Optimal Taxation with Rent-Seeking
Shows that optimal income-tax design must account for high earners who engage in rent-seeking rather than value creation.
Summary
This 2011 NBER paper (w17035) by Casey Rothschild and Florian Scheuer extends optimal-tax theory to a world where some high incomes come from rent-seeking rather than productive contribution.
Key Finding
When part of top earnings reflects rent extraction (capturing existing value) rather than new production, the optimal income tax differs from the standard model: higher marginal rates can be efficient because they discourage socially wasteful rent-seeking without sacrificing genuine production. The paper provides a rigorous foundation for treating rent-seeking as central to tax design — complementing the Georgist case for taxing rents directly at their source.
Bears On
- Problem (supports the mechanism): Rent-seeking drags economic growth — the optimal-tax corroboration: when top incomes partly reflect rent extraction, taxing them more heavily discourages socially wasteful activity without sacrificing genuine production.
- Concept: Rent-Seeking
Sources
- Rothschild & Scheuer (2011), "Optimal Taxation with Rent-Seeking," NBER Working Paper 17035 — used for the result that when part of high incomes reflects rent-seeking (zero-sum effort) rather than production, optimal marginal tax rates on top earners are higher than the standard model implies. PDF · 📄 Local copy