This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

  1. Home
  2. Journals
  3. American Economic Review
  4. October 2015
  5. Technical Change, Wage Inequality, and Taxes

Technical Change, Wage Inequality, and Taxes

Download Full Text PDF

Abstract

This paper considers the normative implications of technical change for tax policy design. A task-to-talent assignment model of the labor market is embedded into an optimal tax problem. Technical change modifies equilibrium wage growth across talents and the substitutability of talents across tasks. The overall optimal policy response is to reduce marginal income taxes on low to middle incomes, while raising those on middle to high incomes. The reform favors those in the middle of the income distribution, reducing their average taxes while lowering transfers to those at the bottom. (JEL D31, H21, H23, H24, J31, O33)

Citation

Ales, Laurence, Musab Kurnaz, and Christopher Sleet. 2015. "Technical Change, Wage Inequality, and Taxes." American Economic Review, 105 (10): 3061-3101. DOI: 10.1257/aer.20140466

Additional Materials

JEL Classification

  • D31 Personal Income, Wealth, and Their Distributions
  • H21 Taxation and Subsidies: Efficiency; Optimal Taxation
  • H23 Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies
  • H24 Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
  • J31 Wage Level and Structure; Wage Differentials
  • O33 Technological Change: Choices and Consequences; Diffusion Processes