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A note on income taxation and occupational choice

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  • Sheshinski, Eytan

Abstract

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.

Suggested Citation

  • Sheshinski, Eytan, 2016. "A note on income taxation and occupational choice," Research in Economics, Elsevier, vol. 70(1), pages 20-23.
    • Handle: RePEc:eee:reecon:v:70:y:2016:i:1:p:20-23
    DOI: 10.1016/j.rie.2015.05.003
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    1. Sheshinski, Eytan, 1982. "Wage Policy in the Public Sector and Income Distribution," MPRA Paper 73738, University Library of Munich, Germany.
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    Cited by:

    1. Arnaud Dupuy & Alfred Galichon & Sonia Jaffe & Scott Duke Kominers, 2020. "Taxation In Matching Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 61(4), pages 1591-1634, November.
    2. Mikhalishchev, Sergei, 2023. "Optimal menu when agents make mistakes," Research in Economics, Elsevier, vol. 77(1), pages 25-33.

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