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Differential Taxation and Occupational Choice

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  • Renato Gomes
  • Jean-Marie Lozachmeur
  • Alessandro Pavan

Abstract

We develop a framework to study optimal sector-specific taxation, where each agent chooses an occupation by comparing her skill differential with the tax burden differential across sectors. Because skills are not perfectly transferable, the Diamond–Mirrlees theorem (according to which the second-best entails production efficiency) fails: social welfare can be increased by inducing some agents to join the sector in which their productivity is not the highest. At the optimum, income taxes balance the marginal losses from inter-sector migration with the marginal gains from tailoring tax schedules to the distribution of productivities in each sector (“tagging”). A calibrated model indicates that sector-specific taxation generates substantive welfare gains when skill transferability decreases with income, as it enables the government to increase average taxes on high earners with large wage premia.

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  • Renato Gomes & Jean-Marie Lozachmeur & Alessandro Pavan, 2018. "Differential Taxation and Occupational Choice," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(1), pages 511-557.
    • Handle: RePEc:oup:restud:v:85:y:2018:i:1:p:511-557.
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    File URL: http://hdl.handle.net/10.1093/restud/rdx022
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    Cited by:

    1. Laurence Jacquet & Etienne Lehmann, 2015. "Optimal Income Taxation when Skills and Behavioral Elasticities are Heterogeneous," CESifo Working Paper Series 5265, CESifo.
    2. Laurence Jacquet & Etienne Lehmann, 2023. "Optimal tax problems with multidimensional heterogeneity: a mechanism design approach," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 60(1), pages 135-164, January.
    3. Hakan Selin & Laurent Simula, 2017. "Income Creation and/or Income Shifting? The Intensive vs. the Extensive Shifting Margins," Post-Print halshs-01666994, HAL.
    4. Casey Rothschild & Florian Scheuer, 2014. "A Theory of Income Taxation under Multidimensional Skill Heterogeneity," NBER Working Papers 19822, National Bureau of Economic Research, Inc.
    5. Robin Boadway & Zhen Song & Jean‐François Tremblay, 2017. "Optimal Income Taxation and Job Choice," Scandinavian Journal of Economics, Wiley Blackwell, vol. 119(4), pages 910-938, October.
    6. Stéphane Gauthier & Guy Laroque, 2019. "Production efficiency and profit taxation," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 52(2), pages 215-223, February.
    7. Xiaokuai Shao, 2021. "Matching under school and home bundling," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(3), pages 567-611, June.
    8. Laurence Jacquet & Etienne Lehmann, 2021. "Optimal Income Taxation with Composition Effects," Journal of the European Economic Association, European Economic Association, vol. 19(2), pages 1299-1341.
    9. Saint-Paul, Gilles, 2021. "Pareto-improving structural reforms," Journal of Economic Theory, Elsevier, vol. 194(C).
    10. Kessing, Sebastian G. & Lipatov, Vilen & Zoubek, J. Malte, 2020. "Optimal taxation under regional inequality," European Economic Review, Elsevier, vol. 126(C).
    11. Doligalski, Paweł & Rojas, Luis E., 2023. "Optimal redistribution with a shadow economy," Theoretical Economics, Econometric Society, vol. 18(2), May.
    12. Håkan Selin & Laurent Simula, 2017. "Income Shifting as Income Creation? The Intensive vs. the Extensive Shifting Margins," CESifo Working Paper Series 6510, CESifo.
    13. Sebastian Koehne, 2018. "On The Taxation Of Durable Goods," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(2), pages 825-857, May.
    14. Cui, Xiaoyong & Gong, Liutang & Li, Wenjian, 2021. "Supply-side optimal capital taxation with endogenous wage inequality," Journal of Public Economics, Elsevier, vol. 198(C).
    15. Uwe Thuemmel, 2018. "Optimal Taxation of Robots," CESifo Working Paper Series 7317, CESifo.
    16. 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.
    17. Abdoulaye Ndiaye, 2017. "Flexible Retirement and Optimal Taxation," Working Paper Series WP-2018-18, Federal Reserve Bank of Chicago.
    18. Bas Jacobs & Uwe Thuemmel, 2023. "Optimal linear income taxes and education subsidies under skill-biased technical change," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(6), pages 1529-1575, December.
    19. Philipp Krug, 2022. "Optimal Estate Taxation: More (about) Heterogeneity across Dynasties," Working Papers 217, Bavarian Graduate Program in Economics (BGPE).

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    More about this item

    Keywords

    Income taxation; Occupational choice; Sales taxes; Sector-specific taxation; Production efficiency;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D62 - Microeconomics - - Welfare Economics - - - Externalities

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