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

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  • David Powell
  • Hui Shan
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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.

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Bibliographic Info

Paper provided by RAND Corporation Publications Department in its series Working Papers with number 705-1.

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Length: 37 pages
Date of creation: Dec 2010
Date of revision:
Handle: RePEc:ran:wpaper:705-1

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Keywords: income taxes; occupational choice; compensating differentials;

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  1. Gruber, Jonathan & Lettau, Michael, 2004. "How elastic is the firm's demand for health insurance?," Journal of Public Economics, Elsevier, vol. 88(7-8), pages 1273-1293, July.
  2. David Powell & Hui Shan, 2012. "Income Taxes, Compensating Differentials, and Occupational Choice: How Taxes Distort the Wage-Amenity Decision," American Economic Journal: Economic Policy, American Economic Association, vol. 4(1), pages 224-47, February.
  3. Gruber, Jon & Saez, Emmanuel, 2002. "The elasticity of taxable income: evidence and implications," Journal of Public Economics, Elsevier, vol. 84(1), pages 1-32, April.
  4. David Albouy, 2009. "The Unequal Geographic Burden of Federal Taxation," Journal of Political Economy, University of Chicago Press, vol. 117(4), pages 635-667, 08.
  5. Daniel Feenberg & Elisabeth Coutts, 1993. "An introduction to the TAXSIM model," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 12(1), pages 189-194.
  6. Garen, John, 1988. "Compensating Wage Differentials and the Endogeneity of Job Riskiness," The Review of Economics and Statistics, MIT Press, vol. 70(1), pages 9-16, February.
  7. David Powell, 2010. "Heterogeneity in Income Tax Incidence: Are the Wages of Dangerous Jobs More Responsive to Tax Changes than the Wages of Safe Jobs?," Working Papers 706-1, RAND Corporation Publications Department.
  8. Martin Feldstein, 1995. "Tax Avoidance and the Deadweight Loss of the Income Tax," NBER Working Papers 5055, National Bureau of Economic Research, Inc.
  9. Kostiuk, Peter F, 1990. "Compensating Differentials for Shift Work," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1054-75, October.
  10. Eissa, Nada & Hoynes, Hilary Williamson, 2004. "Taxes and the labor market participation of married couples: the earned income tax credit," Journal of Public Economics, Elsevier, vol. 88(9-10), pages 1931-1958, August.
  11. Currie, Janet & Gruber, Jonathan, 1996. "Saving Babies: The Efficacy and Cost of Recent Changes in the Medicaid Eligibility of Pregnant Women," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1263-96, December.
  12. Hersch, Joni, 1998. "Compensating Differentials for Gender-Specific Job Injury Risks," American Economic Review, American Economic Association, vol. 88(3), pages 598-627, June.
  13. Duncan, Greg J & Stafford, Frank P, 1980. "Do Union Members Receive Compensating Wage Differentials?," American Economic Review, American Economic Association, vol. 70(3), pages 355-71, June.
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Cited by:
  1. David Powell & Hui Shan, 2010. "Income Taxes, Compensating Differentials, and Occupational Choice: How Taxes Distort the Wage-Amenity Decision," Working Papers 705-1, RAND Corporation Publications Department.
  2. Abby Alpert & David Powell, 2012. "Tax Elasticity of Labor Earnings for Older Individuals," Working Papers wp272, University of Michigan, Michigan Retirement Research Center.

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