Income taxes, compensating differentials, and occupational choice: how taxes distort the wage-amenity decision

David Powell and Hui Shan

No 2010-04, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: The link between taxes and occupational choices is central for understanding the welfare impacts of income taxes. Just as taxes distort the labor-leisure decision, they also distort the wage-amenity decision. Yet, there are no estimates of the full response on this margin. When tax rates increase, workers favor jobs with lower wages and more non-taxable amenities. We introduce a two-step methodology which uses compensating differentials to characterize the tax elasticity of occupational choice. We estimate a significant compensated elasticity of 0.05, implying that a 10% increase in the net-of-tax rate causes workers to change to a 0.5% higher wage job.

Keywords: Income tax; Employee fringe benefits (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-lab and nep-pub
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Related works:
Journal Article: Income Taxes, Compensating Differentials, and Occupational Choice: How Taxes Distort the Wage-Amenity Decision (2012)
Working Paper: Income Taxes, Compensating Differentials, and Occupational Choice How Taxes Distort the Wage-Amenity Decision (2011)
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