Income Taxes, Compensating Differentials, and Occupational Choice How Taxes Distort the Wage-Amenity Decision

David Powell and Hui Shan

No WR-705-1, Working Papers from RAND Corporation

Abstract: The link between taxes and occupational choices is central for understanding the welfare impacts of income taxes. Just as taxes distort the labor-leisure decision, they also distort the wage-amenity decision. Yet, there have been few studies on the full response along this margin. When tax rates increase, workers favor jobs with lower wages and more amenities. The authors introduce a two-step methodology which uses compensating differentials to characterize the tax elasticity of occupational choice. They estimate a significant compensated elasticity of 0.03, implying that a 10% increase in the net-of-tax rate causes workers to change to a 0.3% higher wage job.

Keywords: income taxes; occupational choice; compensating differentials (search for similar items in EconPapers)
JEL-codes: H24 H31 J24 (search for similar items in EconPapers)
Pages: 37
Date: 2011-01
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Related works:
Journal Article: Income Taxes, Compensating Differentials, and Occupational Choice: How Taxes Distort the Wage-Amenity Decision (2012)
Working Paper: Income taxes, compensating differentials, and occupational choice: how taxes distort the wage-amenity decision (2010)
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