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Taxation and Tournaments
Author(s) -
PERSSON MATS,
SANDMO AGNAR
Publication year - 2005
Publication title -
journal of public economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.809
H-Index - 32
eISSN - 1467-9779
pISSN - 1097-3923
DOI - 10.1111/j.1467-9779.2005.00233.x
Subject(s) - economics , inequity aversion , tournament , context (archaeology) , welfare , inequality , order (exchange) , microeconomics , income tax , schedule , general equilibrium theory , rank (graph theory) , public economics , market economy , mathematics , mathematical analysis , paleontology , management , finance , combinatorics , biology
This paper analyzes the effects of progressive taxes on labor supply and income distribution in the context of the rank‐order tournament model originally developed by Lazear and Rosen (1981). We show conditions under which a more progressive tax schedule will cause so large general equilibrium effects that the inequality in disposable income will actually increase. We also show that a non‐zero redistributive tax is always optimal if society's welfare function displays inequality aversion; this result always holds, regardless of behavioral responses and general equilibrium effects.