Bailouts and the Optimal Taxation of Bonus Pay
Timothy Besley, Maitreesh Ghatak
American Economic Review · 2013 · Volume 103 · Issue 3
Abstract
This paper argues that the possibility of bailouts to financial intermediaries distorts the supply price of capital and creates an argument for taxing financial bonuses separately from other sources of income. We develop a model of financial contracting where intermediaries compete for workers whose actions affect productivity and risk-taking in the financial sector. This derives the second-best optimum and market equilibrium. The optimal taxes that we propose increase both equity and efficiency compared to the pure market outcome.
Keywords
Taxation and Subsidies: Efficiency, Optimal Taxation, Personal Income and Other Nonbusiness Taxes and Subsidies, includes inheritance and gift taxes, Compensation Packages, Payment Methods
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