The effects of progressive income taxation on job turnover

Abstract

We examine whether the level of the income tax rate and the convexity of the income tax schedule affect job mobility, as measured by moving to a better job. While the predicted effect of the level of the tax rate is ambiguous, we predict that an increase in the convexity of the tax schedule decreases job search activity by taxing away some of the benefits of a successful job search. Using data from the Panel Study of Income Dynamics, we estimate that both higher tax rates and increased tax rate progressivity decrease the probability that a head of household will move to a better job during the coming year. Our estimates imply that a five-percentage-point reduction in the marginal tax rate increases the average probability of moving to a better job by 0.79 percentage points (a 8.0% increase in the turnover propensity) and that a one-standard-deviation decrease in our measure of tax progressivity would increase this probability by 0.86 percentage points (a 8.7% increase in the turnover propensity). This estimate is robust to sensitivity analysis examining the importance of different sources of identification and variation in estimated effects across subgroups in the population. Our estimated importance of tax policy for job turnover suggests a potential role in explaining the responsiveness of taxable income to marginal tax rates.