Taxation and the Allocation of Talent
Taxation affects the allocation of talented individuals across industries by blunting material incentives and thus relatively magnifying the non-pecuniary benefits of pursuing a "calling". If higher-paying industries (e.g. finance and management) generate less positive net externalities than lower-paying professions (e.g. public service and education) this may enhance efficiency. We develop a theory of income taxation as implicit Pigouvian taxation of these externalities and calibrate it using data on the distribution of income and talent across industries. Even without any redistributive motive, tax rates are highly sensitive to the externalities assumed within a spectrum many would consider reasonable: they range from extremely regressive to highly progressive at high incomes. Our theory thus offers an alternative, pure efficiency rationale for non-linear income taxation, challenging the connection between high long-run labor supply elasticities and low optimal tax rates and motivating further study of the externalities generated by professions.
|Date of creation:||2013|
|Date of revision:|
|Contact details of provider:|| Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA|
Web page: http://www.EconomicDynamics.org/
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- Casey Rothschild & Florian Scheuer, 2014.
"Optimal Taxation with Rent-Seeking,"
CESifo Working Paper Series
5071, CESifo Group Munich.
- Hirshleifer, Jack, 1971. "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review, American Economic Association, vol. 61(4), pages 561-74, September.
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