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Differential Taxation and Occupational Choice

Author

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  • Renato Gomes
  • Jean-Marie Lozachmeur
  • Alessandro Pavan

Abstract

We study nonlinear income taxation in a Roy model in which agents’ productivity is sector-specific. We show that when income taxes can be sector-specific, the Diamond-Mirrlees theorem (according to which the second-best displays production efficiency) fails: social welfare (be it Rawlsian or Weighed Utilitarian) can be increased by assigning some agents to their least productive sector. By sacrificing production efficiency, the planner incurs second-order losses in total output, but obtains a first-order reduction in the informational costs of redistribution. The same result obtains when the government is constrained to a uniform income tax schedule, as long as sales taxes can be made sector-specific. In this latter case, our result also implies failure of the Atkinson-Stiglitz theorem (according to which, when preferences over consumption and leisure are separable, as they are in our economy, the second-best can be implemented with zero sales taxes).

Suggested Citation

  • Renato Gomes & Jean-Marie Lozachmeur & Alessandro Pavan, 2014. "Differential Taxation and Occupational Choice," Discussion Papers 1577, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    • Handle: RePEc:nwu:cmsems:1577
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    References listed on IDEAS

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    Cited by:

    1. Casey Rothschild & Florian Scheuer, 2014. "A Theory of Income Taxation under Multidimensional Skill Heterogeneity," NBER Working Papers 19822, National Bureau of Economic Research, Inc.
    2. Hakan Selin & Laurent Simula, 2017. "Income Creation and/or Income Shifting? The Intensive vs. the Extensive Shifting Margins," Post-Print halshs-01666994, HAL.
    3. repec:bla:scandj:v:119:y:2017:i:4:p:910-938 is not listed on IDEAS
    4. 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.

    More about this item

    Keywords

    income taxation; occupational choice; sales taxes; sector-specific taxation; production efficiency JEL Classification: C72; D62;

    JEL classification:

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

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