Extension: Piketty, Saez, Stantcheva
In the paper ‘Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities’, Piketty, Saez, and Stantcheva provide valuable addition to the literature body on optimal taxation. The study explores the relationship between the behavioral response of the top income group and their optimal income tax.
It is widely known that decreasing top level income tax results in higher income inequality between the top earners and the others in the economy. The authors explore three possible mechanisms that occurs when income tax is low that leads to this outcome. First is the increase in economic activity (supply-side), second is lower levels of tax avoidance and third is higher levels of bargaining, all of which leads to higher income for top earners. Previous studies have only considered the first two behavioral responses. This paper makes a novel contribution by showing that the third overshadows the other responses. The three responses have been incorporated as three elasticities in the standard tax optimizing welfare function. Higher the elasticity, the more the behavior fluctuation with change in tax rates.
Two main datasets are used in this study. The first is a macro-level dataset from the World Top Income Database. It provides a time series data of top income shares, top income tax rates, and the real GDP per capita for different countries. The second is a micro-level CEO income dataset for the US since 1970 and for the world for 2006. This dataset is assembled from multiple sources: Forbes 800 compensation data, Execucomp data, and the COMPUSTAT-CRSP database. The study found that the highest elasticity was for the bargaining component, and the optimal tax was 83% in the three-elasticity case as compared to only 57% taking only the supply-side response.
The theoretical extension that I would like to propose is to explore the effect of taxation on corporate malpractice. As this study already shows, the incentive for top earners to bargain and strive for higher income is much larger when the top marginal income tax is low. Thus, my hypothesis is that there is much more incentive for top executives to indulge in unethical practices that rewards them with more income when the top marginal tax rates are low. The data for this study could be a panel data for multiple companies with indicator variable = 1 for the period of convicted unethical behavior. This data can be compiled by scraping news sources. The company data sources given for companies given in this paper can be used to obtain the control variables for the company characteristics. Once the panel data is assembled, machine learning models (regression, decision trees, survival models, neural networks) to predict unethical behavior based the given control and tax rate variables. The statistical significance of the tax variable would prove or disprove the given hypothesis. This study can potentially shed new lights on the additional social benefits of having higher top level income tax.
Extension: Piketty, Saez, Stantcheva In the paper ‘Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities’, Piketty, Saez, and Stantcheva provide valuable addition to the literature body on optimal taxation. The study explores the relationship between the behavioral response of the top income group and their optimal income tax. It is widely known that decreasing top level income tax results in higher income inequality between the top earners and the others in the economy. The authors explore three possible mechanisms that occurs when income tax is low that leads to this outcome. First is the increase in economic activity (supply-side), second is lower levels of tax avoidance and third is higher levels of bargaining, all of which leads to higher income for top earners. Previous studies have only considered the first two behavioral responses. This paper makes a novel contribution by showing that the third overshadows the other responses. The three responses have been incorporated as three elasticities in the standard tax optimizing welfare function. Higher the elasticity, the more the behavior fluctuation with change in tax rates.
Two main datasets are used in this study. The first is a macro-level dataset from the World Top Income Database. It provides a time series data of top income shares, top income tax rates, and the real GDP per capita for different countries. The second is a micro-level CEO income dataset for the US since 1970 and for the world for 2006. This dataset is assembled from multiple sources: Forbes 800 compensation data, Execucomp data, and the COMPUSTAT-CRSP database. The study found that the highest elasticity was for the bargaining component, and the optimal tax was 83% in the three-elasticity case as compared to only 57% taking only the supply-side response.
The theoretical extension that I would like to propose is to explore the effect of taxation on corporate malpractice. As this study already shows, the incentive for top earners to bargain and strive for higher income is much larger when the top marginal income tax is low. Thus, my hypothesis is that there is much more incentive for top executives to indulge in unethical practices that rewards them with more income when the top marginal tax rates are low. The data for this study could be a panel data for multiple companies with indicator variable = 1 for the period of convicted unethical behavior. This data can be compiled by scraping news sources. The company data sources given for companies given in this paper can be used to obtain the control variables for the company characteristics. Once the panel data is assembled, machine learning models (regression, decision trees, survival models, neural networks) to predict unethical behavior based the given control and tax rate variables. The statistical significance of the tax variable would prove or disprove the given hypothesis. This study can potentially shed new lights on the additional social benefits of having higher top level income tax.