Taxation and the Allocation of Talent
Harvard University, Department of Economics - Littauer Center
Northwestern University - Kellogg School of Management
E. Glen Weyl
Microsoft Research New England; University of Chicago
November 9, 2015
Taxation affects the allocation of talented individuals across professions by blunting material incentives and thus relatively magnifying the non-pecuniary benefits of pursuing a "calling." Estimates from the literature suggest high-paying professions have negative externalities, whereas low-paying professions have positive externalities. A calibrated model therefore prescribes negative rates on middle-class incomes and positive rates on the rich. However, the welfare gains from implementing such a policy are small and are dwarfed by the gains from profession-specific taxes and subsidies. These results depend crucially on externality estimates and labor-substitution patterns across professions. Both merit greater empirical study.
Number of Pages in PDF File: 61
Keywords: occupational choice, allocation of talent, optimal income taxation, Pigouvian taxation, Just Desserts
JEL Classification: D62, H21, H24, J24
Date posted: January 8, 2009 ; Last revised: November 10, 2015
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