A note on income taxation and occupational choice

This note shows that, in case of suboptimal occupational choice, labor taxation can generate a relevant deadweight loss. With varying aptitudes in different occupations, individuals typically maximize income by specializing in one occupation which promises the highest income, but various labor marke...

Full description

Saved in:
Bibliographic Details
Published in:Research in economics 2016-03, Vol.70 (1), p.20-23
Main Author: Sheshinski, Eytan
Format: Article
Language:English
Subjects:
Distribution of aptitudes
Logit model
Size distribution of income
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:This note shows that, in case of suboptimal occupational choice, labor taxation can generate a relevant deadweight loss. With varying aptitudes in different occupations, individuals typically maximize income by specializing in one occupation which promises the highest income, but various labor market imperfections and uncertainties imply that the choice of the best occupation is accomplished with partial success. We use the multinomial Logit approach to evaluate the magnitude of the distortions due to errors in occupational choice caused by income taxation. Under plausible parameterization, we snow that the deadweight loss can be as high as a third of total income.
ISSN:1090-9443
1090-9451
DOI:10.1016/j.rie.2015.05.003