Psychic Income, Taxes and the Allocation of Talent

Abstract The efficiency consequences of taxation through its effect on occupational choice can be the opposite of the traditional labor supply effects that economists have focused on. Murphy et al. (1991) argue that some occupations may have positive, others negative, externalities. If occupations with positive externalities tend to be more enjoyable, then progressive taxation can have the efficiency benefit of encouraging talented, well-educated workers to go into more enjoyable, socially…