Taxation and the Allocation of Talent
Taxation affects the allocation of talented individuals across professions by blunting material incentives and thus magnifying non-pecuniary incentives of pursuing a “calling.” Estimates from the literature suggest high-paying professions have negative externalities, whereas low-paying professions have positive externalities. A calibrated model therefore prescribes negative marginal tax rates on middle-class incomes and positive rates on the rich. The welfare gains from implementing such a policy are small and are dwarfed by the gains from profession-specific taxes and subsidies. These results depend crucially on externality estimates and labor-substitution patterns across professions, both of which are very uncertain given existing empirical evidence.
Nathanson, Charles, Benjamin B. Lockwood and E. Glen Weyl. Forthcoming. Taxation and the Allocation of Talent. Journal of Political Economy.