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Market Power and Income Taxation

Authors :
Louis Kaplow
Source :
American Economic Journal: Economic Policy. 13:329-354
Publication Year :
2021
Publisher :
American Economic Association, 2021.

Abstract

Does significant market power or the presence of large rents affect optimal income taxation, calling for greater redistribution due to tainted gains? Or perhaps less because of an additional wedge that distorts labor effort? Do concerns about inequality have implications for antitrust, regulation, trade, and other policies that influence market power, which contributes to inequality? This article addresses these questions in a model with heterogeneous abilities and hence a concern for distribution, markups, multiple sectors, ownership that is a function of income, allowance for any share of profits to be recoveries of investments (including rent-seeking efforts), endogenous labor supply, and a nonlinear income tax. In this model, proportional markups with no profit dissipation have no effect on the economy, and a policy that reduces a nonproportional markup raises (lowers) welfare when it is higher (lower) than a weighted average of other markups. With proportional (partial or full) profit dissipation, proportional markups are equivalent to a downward shift of the distribution of abilities, and the welfare effect of correcting nonproportional markups associated with nonproportional profit dissipation now depends also on the degree of dissipation and how that is affected by the policy. In all cases, optimal policies maximize consumer plus producer surplus, without regard to a policy’s distributive effects on consumers and profits or how markups and income taxation distort labor effort.

Details

ISSN :
1945774X and 19457731
Volume :
13
Database :
OpenAIRE
Journal :
American Economic Journal: Economic Policy
Accession number :
edsair.doi...........c7ce4239b2b85e17d1aa8b504be06f83