Taxation and the Allocation of Talent
Benjamin B Lockwood
University of Pennsylvania - The Wharton School
Northwestern University - Kellogg School of Management
E. Glen Weyl
Microsoft Research New York City; Yale University
April 25, 2016
Journal of Political Economy, Forthcoming
Taxation affects the allocation of talented individuals across professions by blunting material incentives and thus magnifying non-pecuniary incentives 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 marginal tax rates on middle-class incomes and positive rates on the rich. 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 of which are very uncertain given existing empirical evidence.
Number of Pages in PDF File: 67
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: April 26, 2016
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