Optimal Income Taxation with Spillovers from Employer Learning

Ashley Craig

American Economic Journal: Economic Policy, 2023, vol. 15, issue 2, 82-125

Abstract: I study optimal income taxation when human capital investment is imperfectly observable by employers. In the model, Bayesian inference about worker productivity compresses the wage distribution, lowering the private return to human capital investment. An externality arises: given the same information, employers are more optimistic about each individual if workers are generally more productive. The significance of this externality hinges on the accuracy of employers' beliefs and the responsiveness of human capital. For the United States, taking it into account lowers optimal marginal tax rates for most workers, reducing them by a maximum of 9–13 percentage points between $50,000 and $100,000.

JEL-codes: D83 H21 H24 J24 J31 M51 M52 (search for similar items in EconPapers)
Date: 2023
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Working Paper: Optimal Income Taxation with Spillovers from Employer Learning (2018)
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DOI: 10.1257/pol.20210062

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