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Optimal Income Taxation with Spillovers from Employer Learning

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  • Ashley Cooper Craig

Abstract

I study optimal income taxation when human capital investment is imperfectly observable by employers. In my model, Bayesian employer inference about worker productivity drives a wedge between the private and social returns to human capital investment by compressing the wage distribution. The resulting positive externality from worker investment, all else being equal, calls for lower marginal tax rates. To quantify the significance of this externality for optimal taxation, I calibrate my model to match empirical moments from the United States. To inform my calibration, I provide new evidence on how the speed of employer learning about new labor market entrants varies over the worker productivity distribution. Taking into account the spillover from human capital investment introduced by employer inference reduces optimal marginal tax rates by up to 13 percentage points and produces a welfare gain equivalent to raising every worker's consumption by one percent.

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  • Ashley Cooper Craig, 2018. "Optimal Income Taxation with Spillovers from Employer Learning," 2018 Papers pcr186, Job Market Papers.
  • Handle: RePEc:jmp:jm2018:pcr186
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    References listed on IDEAS

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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. 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.

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    More about this item

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • I2 - Health, Education, and Welfare - - Education
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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