When Redistribution Leads to Regressive Taxation

Abstract

We introduce labor contracts in a framework of optimal redistribution: firms have some local market power and try to discriminate among heterogeneous workers. In this setting we show that if the firms have perfect information, i.e., they perfectly discriminate against workers and take all the surplus, the best tax function is flat. If firms have imperfect information, i.e., if they offer incentive contracts, then (under some assumptions) the best redistributive taxation is regressive. Copyright 2007 Blackwell Publishing, Inc..

Poultry farmers willingness to pay for agricultural tax: evidence from the Bono region, Ghana

“…Regressive tax decreases the tax burden on increasing levels of income. For instance, a worker becomes less motivated to work should his salary be taxed, but a regressive income tax would augment his income (Hariton and Piaser, 2007;Feng and Villamil, 2017). Besides, developing countries have considered regressive tax as effective compared to progressive tax because it does not affect the activities of the economy negatively (Kato and Tanaka, 2014).…”

Monopsony power, income taxation and welfare

“…As I do, Hariton and Piaser (2007) and da Costa and Maestri (2019) analyze a model where labor supply responds on the intensive (hours, effort) margin, whereas Cahuc and Laroque (2014) focus on the extensive (participation) margin, which I add in an extension. 3 These studies assume that firms -like the government -do not observe workers' abilities (Hariton and Piaser (2007) and da Costa and Maestri (2019)) or their reservation wages (Cahuc and Laroque (2014)). Monopsony power then leads to a downward distortion in employment, either in hours worked or the number of individuals employed.…”

“…Moreover, in my model monopsony power might raise welfare. This is not possible in Hariton and Piaser (2007), Cahuc and Laroque (2014) and da Costa and Maestri (2019), since firms do not have an informational advantage compared to the government about their workers' abilities. Kaplow (2019) and Atesagaoglu and Yazici (2020) study optimal taxation in a model with mark-ups.…”

“…This formulation makes clear that, despite firms and workers are matched exogenously, each 8 See Stantcheva (2014), Bastani et al (2015) and Craig (2020) for an analysis of optimal income taxation if firms do not (perfectly) observe ability. Unlike Hariton and Piaser (2007) and da Costa and Maestri (2019), these studies assume that firms have no monopsony power and competition drives (expected) profits to zero. firm still faces an upward-sloping labor supply curve.…”

Rising Markups and Optimal Redistributive Taxation

“…An exception is Boar and Midrigan (2019), which is discussed below. One strand of the literature studies optimal Mirrleesian income taxation with firms that have monopsony power (Hariton and Piaser 2007;da Costa and Maestri 2018;Hummel 2020). Kaplow (2019) examines optimal labor income taxation in a setting where firms charge a constant and exogenous markup over marginal costs.…”