Taxation and the Allocation of Talent

Eric Weyl, Charles Nathanson and Ben Lockwood
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Eric Weyl: University of Chicago
Charles Nathanson: Harvard University
Ben Lockwood: Harvard University

No 56, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: Taxation affects the allocation of talented individuals across industries by blunting material incentives and thus relatively magnifying the non-pecuniary benefits of pursuing a "calling". If higher-paying industries (e.g. finance and management) generate less positive net externalities than lower-paying professions (e.g. public service and education) this may enhance efficiency. We develop a theory of income taxation as implicit Pigouvian taxation of these externalities and calibrate it using data on the distribution of income and talent across industries. Even without any redistributive motive, tax rates are highly sensitive to the externalities assumed within a spectrum many would consider reasonable: they range from extremely regressive to highly progressive at high incomes. Our theory thus offers an alternative, pure efficiency rationale for non-linear income taxation, challenging the connection between high long-run labor supply elasticities and low optimal tax rates and motivating further study of the externalities generated by professions.

Date: 2013
New Economics Papers: this item is included in nep-ltv, nep-pbe and nep-pub
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