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This paper characterizes the optimal taxation of top earners in
a world with externalities. It develops a reduced-form approach
that allows for a flexible relationship between top earnings and the
distribution of earnings capacities in the population. The optimal
top tax rate is expressed in terms of simple sufficient statistics
formulas that depend on the magnitude and distribution of net
externalities. In general, externalities that run from top earners
to bottom earners have much stronger policy implications than
externalities within top earners. The theory is linked to evidence
on the externalities of top entrepreneurs and a calibration analysis
is provided.
