Differential Taxation and Occupational Choice

Renato Gomes, Jean-Marie Lozachmeur and Alessandro Pavan

Discussion Papers from Northwestern University, Center for Mathematical Studies in Economics and Management Science

Abstract: We study nonlinear income taxation in a Roy model in which agents’ productivity is sector-specific. We show that when income taxes can be sector-specific, the Diamond-Mirrlees theorem (according to which the second-best displays production efficiency) fails: social welfare (be it Rawlsian or Weighed Utilitarian) can be increased by assigning some agents to their least productive sector. By sacrificing production efficiency, the planner incurs second-order losses in total output, but obtains a first-order reduction in the informational costs of redistribution. The same result obtains when the government is constrained to a uniform income tax schedule, as long as sales taxes can be made sector-specific. In this latter case, our result also implies failure of the Atkinson-Stiglitz theorem (according to which, when preferences over consumption and leisure are separable, as they are in our economy, the second-best can be implemented with zero sales taxes).

Keywords: income taxation; occupational choice; sales taxes; sector-specific taxation; production efficiency JEL Classification: C72; D62 (search for similar items in EconPapers)
Date: 2014-07-01
New Economics Papers: this item is included in nep-pbe and nep-pub
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Differential Taxation and Occupational Choice (2018)
Working Paper: Differential Taxation and Occupational Choice (2017)
Working Paper: Differential Taxation and Occupational Choice (2014)
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