Market Power and Optimal Income Taxation
نویسندگان
چکیده
When product markets are monopolistic, an income redistributive policy affects social welfare not only through changes in disposable income but also through changes in product prices. In the optimal income tax formula, we then obtain a Pigouvian term correcting for this price externality. We provide sufficient conditions when the Pigouvian term is progressive among top earners. Moreover, if the price externality is sufficiently strong, the overall optimal income tax schedule can be progressive. We also establish that the price externality becomes less important if firm profits are either taxed or socially weighted and if market competition intensifies.
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