American Economic Journal:
Economic Policy
ISSN 1945-7731 (Print) | ISSN 1945-774X (Online)
Income Taxes, Compensating Differentials, and Occupational Choice: How Taxes Distort the Wage-Amenity Decision
American Economic Journal: Economic Policy
vol. 4,
no. 1, February 2012
(pp. 224–47)
Abstract
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)Citation
Powell, David, and Hui Shan. 2012. "Income Taxes, Compensating Differentials, and Occupational Choice: How Taxes Distort the Wage-Amenity Decision." American Economic Journal: Economic Policy, 4 (1): 224–47. DOI: 10.1257/pol.4.1.224Additional Materials
JEL Classification
- H24 Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
- H31 Fiscal Policies and Behavior of Economic Agents: Household
- J22 Time Allocation and Labor Supply
- J24 Human Capital; Skills; Occupational Choice; Labor Productivity
- J31 Wage Level and Structure; Wage Differentials
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