Differential taxation and occupational choice

Renato Gomes, Jean Marie Lozachmeur, Alessandro Pavan

Research output: Contribution to journalArticle

5 Scopus citations

Abstract

We develop a framework to study optimal sector-specific taxation, where each agent chooses an occupation by comparing her skill differential with the tax burden differential across sectors. Because skills are not perfectly transferable, the Diamond-Mirrlees theorem (according to which the second-best entails production efficiency) fails: social welfare can be increased by inducing some agents to join the sector in which their productivity is not the highest. At the optimum, income taxes balance the marginal losses from inter-sector migration with the marginal gains from tailoring tax schedules to the distribution of productivities in each sector ("tagging"). A calibrated model indicates that sector-specific taxation generates substantive welfare gains when skill transferability decreases with income, as it enables the government to increase average taxes on high earners with large wage premia.

Original languageEnglish (US)
Article numberrdx022
Pages (from-to)511-557
Number of pages47
JournalReview of Economic Studies
Volume85
Issue number1
DOIs
StatePublished - Jan 1 2018

Keywords

  • Income taxation
  • Occupational choice
  • Production efficiency
  • Sales taxes
  • Sector-specific taxation

ASJC Scopus subject areas

  • Economics and Econometrics

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