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- Title
Rising markups and optimal redistributive taxation.
- Authors
Gürer, Eren
- 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
OPTIMAL taxation; TAX base; TAXATION of profits; INCOME tax; INCOME redistribution; IMPERFECT competition
- Publication
International Tax & Public Finance, 2022, Vol 29, Issue 5, p1227
- ISSN
0927-5940
- Publication type
Article
- DOI
10.1007/s10797-021-09712-y