American Economic Journal:
Economic Policy
ISSN 1945-7731 (Print) | ISSN 1945-774X (Online)
Optimal Income Taxation with Spillovers from Employer Learning
American Economic Journal: Economic Policy
(pp. 82–125)
Abstract
I study optimal income taxation when human capital investment is imperfectly observable by employers. In the model, Bayesian inference about worker productivity compresses the wage distribution, lowering the private return to human capital investment. An externality arises: given the same information, employers are more optimistic about each individual if workers are generally more productive. The significance of this externality hinges on the accuracy of employers' beliefs and the responsiveness of human capital. For the United States, taking it into account lowers optimal marginal tax rates for most workers, reducing them by a maximum of 9–13 percentage points between $50,000 and $100,000.Citation
Craig, Ashley C. 2023. "Optimal Income Taxation with Spillovers from Employer Learning." American Economic Journal: Economic Policy 15 (2): 82–125. DOI: 10.1257/pol.20210062Additional Materials
JEL Classification
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- H21 Taxation and Subsidies: Efficiency; Optimal Taxation
- H24 Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
- J24 Human Capital; Skills; Occupational Choice; Labor Productivity
- J31 Wage Level and Structure; Wage Differentials
- M51 Personnel Economics: Firm Employment Decisions; Promotions
- M52 Personnel Economics: Compensation and Compensation Methods and Their Effects