Economic research increasingly indicates that some professions have “spillovers,” meaning that the social value of an individual’s work can be much higher, or much lower, than that individual’s compensation. The job market does not account for all social value.
What policies can encourage talented workers to choose socially beneficial careers? Our recent paper, titled “Taxation and the Allocation of Talent”, studies this question. Going back to the work of noted British economist Arthur Pigou, economic experts have advocated subsidizing activities with positive spillovers and taxing those with negative spillovers. Our paper applies this idea to the allocation of talent.
We consider two different types of tax policies. In the first, the government amends federal income tax rates overall so that lower-paying, positive-spillover jobs seem more appealing on an after-tax basis. In the second, the government taxes (or subsidizes) some professions more than others.
The first, and more modest, policy of adjusting income tax rates would do little to spur economic growth. The idea here is that raising top tax rates would encourage workers to choose lower-paying jobs, and in some cases that might translate into more workers choosing more socially valuable professions.
In contrast, the second, more radical policy of imposing profession-specific taxes could help the economy grow dramatically. Such taxes directly incentivize workers to enter professions with the highest social spillovers.
Does this mean governments should overhaul their tax codes to introduce different rates for different jobs? We see two reasons why doing so works better in theory than in practice. First, precisely defining occupations would be very difficult, especially with trillions of dollars of tax revenues at stake. Second, profession-specific tax rates create opportunities for profession-specific lobbying. The resulting tax rates might favor sectors with the most political clout rather than the largest spillovers.
(Benjamin B. Lockwood is an assistant professor of business economics and public policy at the Wharton School at the University of Pennsylvania. Charles G. Nathanson is an assistant professor of finance at the Kellogg School of Management at Northwestern University. E. Glen Weyl is a principal researcher at Microsoft Research New England and a visiting senior research scholar at Yale.)
