Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/287488 
Authors: 
Year of Publication: 
2021
Citation: 
[Journal:] International Tax and Public Finance [ISSN:] 1573-6970 [Volume:] 29 [Issue:] 5 [Publisher:] Springer US [Place:] New York, NY [Year:] 2021 [Pages:] 1227-1259
Publisher: 
Springer US, New York, NY
Abstract: 
This study explores the implications of rising markups for optimal Mirrleesian income and profit taxation. Using a stylized model with two individuals, the main forces shaping welfare-optimal policies are analytically characterized. Although a higher profit tax has redistributive benefits, it adversely affects market competition, leading to a greater equilibrium cost-of-living. Rising markups directly contribute to a decline in optimal marginal taxes on labor income. The optimal policy response to higher markups includes increasingly relying on the profit tax to fund redistribution. Declining optimal marginal income taxes assists the redistributive function of the profit tax by contributing to the expansion of the profit tax base. This response alone considerably increases the equilibrium cost-of-living. Nevertheless, a majority of the individuals become better off with the optimal policy. If it is not possible to tax profits optimally, due, for example, to profit shifting, increasing redistribution via income taxes is not optimal; every individual is worse off relative to the scenario with optimal profit taxation.
Subjects: 
Markups
Optimal redistribution
Imperfect competition
Taxation
JEL: 
D43
H21
H25
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article
Document Version: 
Published Version

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