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

  • David Powell
  • Hui Shan
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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 may 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. We introduce a two-step methodology which uses compensating differentials to characterize the tax elasticity of occupational choice. We estimate a significant compensated elasticity of 0.03, implying that a 10 percent increase in the net-oftax rate causes workers to change to a 0.3 percent higher wage job. (JEL H24, H31, J22, J24, J31)

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Article provided by American Economic Association in its journal American Economic Journal: Economic Policy.

Volume (Year): 4 (2012)
Issue (Month): 1 (February)
Pages: 224-47

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Handle: RePEc:aea:aejpol:v:4:y:2012:i:1:p:224-47
Note: DOI: 10.1257/pol.4.1.224
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  12. 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.
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