Taxation and the Allocation of Talent

Benjamin Lockwood, Charles G. Nathanson and E. Glen Weyl

Journal of Political Economy, 2017, vol. 125, issue 5, 1635 - 1682

Abstract: Taxation affects the allocation of talented individuals across professions by blunting material incentives and thus magnifying nonpecuniary incentives of pursuing a "calling." Estimates from the literature suggest that high-paying professions have negative externalities, whereas low-paying professions have positive externalities. A calibrated model therefore prescribes negative marginal tax rates on middle-class incomes and positive rates on the rich. The welfare gains from implementing such a policy are small and are dwarfed by the gains from profession-specific taxes and subsidies. These results depend crucially on externality estimates and labor substitution patterns across professions, both of which are very uncertain given existing empirical evidence.

Date: 2017
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