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Differential Taxation and Occupational Choice

Renato Gomes, Jean-Marie Lozachmeur and Alessandro Pavan

Review of Economic Studies, 2018, vol. 85, issue 1, 511-557

Abstract: We develop a framework to study optimal sector-specific taxation, where each agent chooses an occupation by comparing her skill differential with the tax burden differential across sectors. Because skills are not perfectly transferable, the Diamond–Mirrlees theorem (according to which the second-best entails production efficiency) fails: social welfare can be increased by inducing some agents to join the sector in which their productivity is not the highest. At the optimum, income taxes balance the marginal losses from inter-sector migration with the marginal gains from tailoring tax schedules to the distribution of productivities in each sector (“tagging”). A calibrated model indicates that sector-specific taxation generates substantive welfare gains when skill transferability decreases with income, as it enables the government to increase average taxes on high earners with large wage premia.

Keywords: Income taxation; Occupational choice; Sales taxes; Sector-specific taxation; Production efficiency (search for similar items in EconPapers)
JEL-codes: C72 D62 (search for similar items in EconPapers)
Date: 2018
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Related works:
Working Paper: Differential Taxation and Occupational Choice (2017) Downloads
Working Paper: Differential Taxation and Occupational Choice (2014) Downloads
Working Paper: Differential Taxation and Occupational Choice (2014) Downloads
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