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.
The supplemental appendix to "Taxation and the Allocation of Talent" by the same authors, available at http://ssrn.com/abstract=13244242819544.
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: August 8, 2016