Dynamic Job Market Signaling and Optimal Taxation

How are optimal taxes affected by reputation building and imperfect information
in labor markets? In this paper, I build a model of labor markets with incomplete
and asymmetric information where job histories play a crucial role in transmitting
information about workers’ productivity, which allows us to better understand the
efficiency and distributive consequences of imperfect monitoring and screening in labor
markets, and the tradeoffs the government faces when setting taxes. Optimal taxes
are described by generalized versions of standard redistributive and corrective taxation
formulas, which depend crucially on labor wedges: the marginal contribution to output
relative to the increases in lifetime earnings that result from supplying one extra unit
of labor at each period. Combining estimates from the literature and new estimates
using data from the Health and Retirement Study, I find that the corrective component
of taxes is likely to be large, especially at the top of the income distribution.