Compensating Differentials and Income Taxes

Abstract

Income taxes distort the relationship between wages and nontaxable amenities. When the marginal tax rate increases, amenities become more valuable as the compensating differential for low-amenity jobs is taxed away. While there is evidence that the provision of amenities responds to taxes, the literature has ignored the consequences for job characteristics which cannot fully adjust. This paper compares the wage response of dangerous jobs to the wage response of safe jobs. When tax rates increase, we should see the pretax compensating differential for on-the-job risk increase. Empirically, I find large differences in the wage response of jobs based on their riskiness.