Rising markups and optimal redistributive taxation


Guerer E.

INTERNATIONAL TAX AND PUBLIC FINANCE, vol.29, no.5, pp.1227-1259, 2022 (SSCI) identifier identifier

  • Publication Type: Article / Article
  • Volume: 29 Issue: 5
  • Publication Date: 2022
  • Doi Number: 10.1007/s10797-021-09712-y
  • Journal Name: INTERNATIONAL TAX AND PUBLIC FINANCE
  • Journal Indexes: Social Sciences Citation Index (SSCI), Scopus, IBZ Online, International Bibliography of Social Sciences, ABI/INFORM, EconLit, Public Affairs Index
  • Page Numbers: pp.1227-1259
  • Keywords: Markups, Optimal redistribution, Imperfect competition, Taxation, MULTIMARKET CONTACT, INCOME, ELASTICITIES, COMPETITION, TRADE, MICRO, POWER, BASE, RISE
  • Middle East Technical University Affiliated: No

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.