Optimal Income Taxation and Job Choice

This paper studies optimal income taxation when there are different types of jobs for workers of different skills. Each type of job has a given feasible range of incomes from which workers can choose by varying their labour supply. Workers are more productive than all others in the jobs that suit them best. The model combines features of the classic optimal income tax literature with labour variability along the intensive margin with those of the extensive-margin approach where workers make discrete job choices and/or participation decisions. Some specific results are as follows. First-best maximin levels of utility can be achieved in the second-best. Marginal tax rates below the top can often be negative or zero. When there are more than two skill-types of workers and jobs, incentive constraints are not necessarily binding on adjacent types as in the standard intensive-margin model. When participation decisions are allowed, the intensive margin and the extensive margin tend to have opposite effects on the level of participation taxes.