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Title: The Taxation of Superstars

Author(s): Florian Scheuer and Iván Werning

Publication Date: August 2015

Keyword(s): Earnings Elasticities, Inequality, Optimal Taxation, Sufficient Statistics and Superstar Effects

Programme Area(s): Labour Economics and Public Economics

Abstract: How are optimal taxes affected by the presence of superstar phenomena at the top of the earnings distribution? To answer this question, we extend the Mirrlees model to incorporate an assignment problem in the labor market that generates superstar effects. Perhaps surprisingly, rather than providing a rationale for higher taxes, we show that superstar effects provide a force for lower marginal taxes, conditional on the observed distribution of earnings. Superstar effects make the earnings schedule convex, which increases the responsiveness of individual earnings to tax changes. We show that various common elasticity measures are not sufficient statistics and must be adjusted upwards in optimal tax formulas. Finally, we study a comparative static that does not keep the observed earnings distribution fixed: when superstar technologies are introduced, inequality increases but we obtain a neutrality result, finding tax rates at the top unaltered.

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Bibliographic Reference

Scheuer, F and Werning, I. 2015. 'The Taxation of Superstars'. London, Centre for Economic Policy Research. http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=10778