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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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File URL: http://www.rand.org/content/dam/rand/pubs/working_papers/2011/RAND_WR705-1.pdf
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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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