Taxing mobile and overconfident top earners

We set up a simple model of tax competition for mobile, highly-skilled and overconfident managers. Firms endogenously choose the compensation scheme for managers, which consists of a fixed wage and a bonus payment in the high state. Managers are overconfident about the probability of the high state...

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Bibliographic Details
Published inInternational tax and public finance Vol. 30; no. 4; pp. 913 - 947
Main Authors Haufler, Andreas, Nishimura, Yukihiro
Format Journal Article
LanguageEnglish
Published New York Springer US 01.08.2023
Springer Nature B.V
Subjects
Bonuses
Business Taxation/Tax Law
Compensation
Competition
Cooperation
Economics
Economics and Finance
Equilibrium
Foreign residents
Government
Income distribution
Income taxes
Personality
Personality traits
Public Finance
Success
Tax rates
Tax revenues
Taxation
Wages & salaries
Welfare
Migration
H87
Tax competition
H20
G28
Overconfidence
Bonus taxes
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Summary:We set up a simple model of tax competition for mobile, highly-skilled and overconfident managers. Firms endogenously choose the compensation scheme for managers, which consists of a fixed wage and a bonus payment in the high state. Managers are overconfident about the probability of the high state and hence of receiving the bonus, whereas firms and governments are not. When governments maximize tax revenues, we show that overconfidence unambiguously reduces the bonus tax rate that governments set in the non-cooperative tax equilibrium, while increasing tax revenues. When the government objective incorporates the welfare of resident managers, however, bonus taxes also serve a corrective role and may rise in equilibrium when overconfidence is increased.
ISSN:0927-5940
1573-6970
DOI:10.1007/s10797-022-09730-4