Market Power and Income Taxation

Summary

This 2019 paper (NBER w25578) by Harvard's Louis Kaplow analyses how market power — and the economic rents it produces — should change the design of optimal income taxation.

Key Argument

Standard optimal-tax models assume competitive markets. Kaplow shows that when firms and individuals earn rents from market power, the optimal tax schedule differs, and taxing those rents can be both efficient and equitable. The work reinforces a theme running through modern public economics — that distinguishing earned returns from rents (rent-seeking) is central to good tax design, the same insight that motivates taxing land rent directly.

Bears On

• Concept: Rent-Seeking · Economic Rent

Sources

1. Louis Kaplow (2019), "Market Power and Income Taxation," NBER WP 25578. SSRN