Ferey, Antoine (LMU Munich and CESifo)
Haufler, Andreas (LMU Munich and CESifo)
Perroni, Carlo (University of Warwick and CESifo)
We offer a new explanation for why taxes have become less redistributive in many countries in parallel with an increase in income concentration. When performance-based contracts are needed to incentivize effort, redistribution through progressive income taxes becomes less precisely targeted. Taxation reduces after-tax income inequality but undermines performance-based contracts, lowering effort and raising pre-tax income differentials. Product market integration can widen the spread of project returns and make contract choices more responsive to changes in the level of taxation, resulting in a lower optimal income tax rate even when individuals are not inter-jurisdictionally mobile.
performance contracts; market integration; redistributive taxation
D63; F15; H21