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.
Craig, Ashley C.
"Optimal Income Taxation with Spillovers from Employer Learning."
American Economic Journal: Economic Policy,
Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
Taxation and Subsidies: Efficiency; Optimal Taxation
Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
Human Capital; Skills; Occupational Choice; Labor Productivity
Wage Level and Structure; Wage Differentials
Personnel Economics: Firm Employment Decisions; Promotions
Personnel Economics: Compensation and Compensation Methods and Their Effects