Organization of Knowledge and Taxation

This paper studies how income taxation interacts with the organization of knowledge and production, and ultimately the distribution of wages in the economy. A more progressive tax system reduces the time that managers allocate to work. This makes the organization of production less efficient and reduces wages at both tails of the distribution, which increases lower tail wage inequality and decreases upper tail wage inequality. The optimal tax system is significantly less progressive than the current one in the United States, because a less progressive tax system also generates a less unequal wage distribution.