Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/282027 
Year of Publication: 
2022
Series/Report no.: 
Discussion Paper No. 335
Publisher: 
Ludwig-Maximilians-Universität München und Humboldt-Universität zu Berlin, Collaborative Research Center Transregio 190 - Rationality and Competition, München und Berlin
Abstract: 
We offer a new explanation for why taxes have become less redistributive in many countries in parallel with an increase in income concentration. When performance-based contracts are needed to incentivize effort, redistribution through progressive income taxes becomes less precisely targeted. Taxation reduces after-tax income inequality but undermines performance-based contracts, lowering effort and raising pre-tax income differentials. Product market integration can widen the spread of project returns and make contract choices more responsive to changes in the level of taxation, resulting in a lower optimal income tax rate even when individuals are not inter-jurisdictionally mobile.
Subjects: 
performance contracts
market integration
redistributive taxation
JEL: 
D63
F15
H21
Document Type: 
Working Paper

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