Scandinavian Working Papers in Economics

Seminar Papers,
Stockholm University, Institute for International Economic Studies

No 715: Taxation and Tournaments

Mats Persson () and Agnar Sandmo ()
Additional contact information
Mats Persson: Institute for International Economic Studies, Stockholm University, Postal: Stockholm University, S-106 69 Stockholm, Sweden
Agnar Sandmo: Norwegian School of Economics and Business Administration, Postal: Helleveien 30, N-5045 Bergen, Norway

Abstract: This paper analyzes the effects of progressive taxes on labour 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.

Keywords: TBA

JEL-codes: H00

23 pages, May 24, 2002

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