Differential Taxation and Occupational Choice

Arbeitspapier

We study nonlinear income taxation in a Roy model in which agents' productivity is sectorspecific. We show that when income taxes can be sector-specific, the Diamond-Mirrlees theorem (according to which the second-best displays production efficiency) fails: social welfare (be it Rawlsian or Weighed Utilitarian) can be increased by assigning some agents to their least productive sector. By sacrificing production efficiency, the planner incurs second-order losses in total output, but obtains a first-order reduction in the informational costs of redistribution. The same result obtains when the government is constrained to a uniform income tax schedule, as long as sales taxes can be made sector-specific. In this latter case, our result also implies failure of the Atkinson-Stiglitz theorem (according to which, when preferences over consumption and leisure are separable, as they are in our economy, the second-best can be implemented with zero sales taxes).

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 5054

Classification and Topics

• Classification: Wirtschaft ; Noncooperative Games ; Externalities
• Subject: income taxation ; occupational choice ; sales taxes ; sector-specific taxation ; production efficiency

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Gomes, Renato ; Lozachmeur, Jean-Marie ; Pavan, Alessandro
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2014

Further information

• Handle: http://hdl.handle.net/10419/105115
• Last update: 10.03.2025, 11:42 AM CET