Income Taxes, Compensating Differentials, and Occupational Choice: How Taxes Distort the Wage-Amenity Decision
Authors: Powell, David; Shan, Hui
Source: American Economic Journal: Economic Policy, Volume 4, Number 1, February 2012 , pp. 224-247(24)
Publisher: American Economic Association
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-of-tax rate causes workers to change to a 0.3 percent higher wage job.
Document Type: Research Article
Publication date: 2012-02-01
- American Economic Journal: Economic Policy publishes papers covering a range of topics, the common theme being the role of economic policy in economic outcomes. Subject areas include public economics; urban and regional economics; public policy aspects of health, education, welfare and political institutions; law and economics; economic regulation; and environmental and natural resource economics.
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