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Optimal Income Taxation with Spillovers from Employer Learning

Author

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  • Ashley C. Craig

Abstract

I study optimal income taxation when human capital investment is imperfectly observable by employers. In the model, Bayesian inference about worker productivity compresses the wage distribution, lowering the private return to human capital investment. An externality arises: given the same information, employers are more optimistic about each individual if workers are generally more productive. The significance of this externality hinges on the accuracy of employers' beliefs and the responsiveness of human capital. For the United States, taking it into account lowers optimal marginal tax rates for most workers, reducing them by a maximum of 9–13 percentage points between $50,000 and $100,000.

Suggested Citation

  • Ashley C. Craig, 2023. "Optimal Income Taxation with Spillovers from Employer Learning," American Economic Journal: Economic Policy, American Economic Association, vol. 15(2), pages 82-125, May.
    • Handle: RePEc:aea:aejpol:v:15:y:2023:i:2:p:82-125
    DOI: 10.1257/pol.20210062
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    Citations

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    Cited by:

    1. Fleitas, Sebastián, 2018. "Who benefits when inertia is reduced? Competition, quality and returns to skill in health care markets," Research Department working papers 1161, CAF Development Bank Of Latinamerica.
    2. Albert Jan Hummel, 2021. "Monopsony Power, Income Taxation and Welfare," CESifo Working Paper Series 9128, CESifo.
    3. Aronsson, Thomas & Bastani, Spencer & Tayibov, Khayyam, 2021. "Social Exclusion and Optimal Redistribution," Umeå Economic Studies 1004, Umeå University, Department of Economics.
    4. Albert Jan Hummel, 2021. "Monopsony power, income taxation and welfare," Tinbergen Institute Discussion Papers 21-051/VI, Tinbergen Institute.
    5. Bastani, Spencer & Blumkin, Tomer & Micheletto, Luca, 2021. "Optimal Redistribution in the Presence of Signaling," Working Paper Series 1413, Research Institute of Industrial Economics.
    6. Aronsson, Thomas & Bastani, Spencer & Tayibov, Khayyam, 2025. "Redistribution and labor market inclusion," Working Paper Series 2025:19, IFAU - Institute for Evaluation of Labour Market and Education Policy.
    7. Radoslaw Paluszynski & Pei Cheng Yu, "undated". "Optimal Taxation with Risky Human Capital and Retirement Savings," Discussion Papers 2019-05, School of Economics, The University of New South Wales.
    8. Spencer Bastani & Tomer Blumkin & Luca Micheletto, 2025. "Optimal Redistribution And Education Signaling," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 66(3), pages 1239-1265, August.
    9. Dami'an Vergara, 2022. "Minimum Wages and Optimal Redistribution," Papers 2202.00839, arXiv.org, revised Dec 2022.

    More about this item

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • M51 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Firm Employment Decisions; Promotions
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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