IDEAS home Printed from https://ideas.repec.org/a/bpj/bejeap/v20y2020i2p22n3.html
   My bibliography  Save this article

The Wage Response to a Reduction in Income Tax Rates: The Israeli Tax Reform

Author

Listed:
  • Frish Roni
  • Zussman Noam
  • Igdalov Sophia

    (Bank of Israel, 2 Eliezer Kaplan St, Kiryat Ben Gurion, Jerusalem91007, Israel)

Abstract

This study examines the effect of an income tax reform on wages. An Israeli reform implemented in 2003–2009 reduced individuals’ marginal income tax rate by 7–17 percentage points. We utilized the differential and non-monotonic marginal tax rate reduction, and used Israel Tax Authority panel data of wage earners, merged with Labor Force Surveys. We found that in the business sector, the elasticity of reported gross wages relative to the net-of-tax rate is about 0.1. The wage earners in the lowest wage quintile were not affected by the tax reform, those in the second and third quintiles did not respond to the tax cut, but elasticity increased with wage, reaching about 0.4 in the upper decile. We did not find statistically significant differences in elasticity by gender, ethnicity, or education.

Suggested Citation

  • Frish Roni & Zussman Noam & Igdalov Sophia, 2020. "The Wage Response to a Reduction in Income Tax Rates: The Israeli Tax Reform," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 20(2), pages 1-22, April.
    • Handle: RePEc:bpj:bejeap:v:20:y:2020:i:2:p:22:n:3
    DOI: 10.1515/bejeap-2019-0043
    as

    Download full text from publisher

    File URL: https://doi.org/10.1515/bejeap-2019-0043
    Download Restriction: For access to full text, subscription to the journal or payment for the individual article is required.
    File URL: https://libkey.io/10.1515/bejeap-2019-0043?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Lehmann, Etienne & Marical, François & Rioux, Laurence, 2013. "Labor income responds differently to income-tax and payroll-tax reforms," Journal of Public Economics, Elsevier, vol. 99(C), pages 66-84.
    2. Emmanuel Saez & Joel Slemrod & Seth H. Giertz, 2012. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 50(1), pages 3-50, March.
    3. Gruber, Jon & Saez, Emmanuel, 2002. "The elasticity of taxable income: evidence and implications," Journal of Public Economics, Elsevier, vol. 84(1), pages 1-32, April.
    4. Raj Chetty & John N. Friedman & Tore Olsen & Luigi Pistaferri, 2011. "Adjustment Costs, Firm Responses, and Micro vs. Macro Labor Supply Elasticities: Evidence from Danish Tax Records," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(2), pages 749-804.
    5. Áron Kiss & Pálma Mosberger, 2015. "The elasticity of taxable income of high earners: evidence from Hungary," Empirical Economics, Springer, vol. 48(2), pages 883-908, March.
    6. Jos順鬩x Sanz-Sanz & Mar𨁁rrazola-Vacas & Nuria Rueda-L󰥺 & Desiderio Romero-Jordᮠ, 2015. "Reported gross income and marginal tax rates: estimation of the behavioural reactions of Spanish taxpayers," Applied Economics, Taylor & Francis Journals, vol. 47(5), pages 466-484, January.
    7. Blomquist, Sören & Selin, Håkan, 2010. "Hourly wage rate and taxable labor income responsiveness to changes in marginal tax rates," Journal of Public Economics, Elsevier, vol. 94(11-12), pages 878-889, December.
    8. Emmanuel Saez, 2010. "Do Taxpayers Bunch at Kink Points?," American Economic Journal: Economic Policy, American Economic Association, vol. 2(3), pages 180-212, August.
    9. Henrik Jacobsen Kleven & Esben Anton Schultz, 2014. "Estimating Taxable Income Responses Using Danish Tax Reforms," American Economic Journal: Economic Policy, American Economic Association, vol. 6(4), pages 271-301, November.
    10. Feldstein, Martin, 1995. "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 551-572, June.
    11. Carina Neisser, 2021. "The Elasticity of Taxable Income: A Meta-Regression Analysis [The top 1% in international and historical perspective]," The Economic Journal, Royal Economic Society, vol. 131(640), pages 3365-3391.
    12. Kleven, Henrik Jacobsen & Schultz, Esben Anton, 2014. "Estimating taxable income responses using Danish tax reforms," LSE Research Online Documents on Economics 66122, London School of Economics and Political Science, LSE Library.
    13. Feldstein, Martin, 1995. "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 551-572, June.
    14. Simon Carey & John Creedy & Norman Gemmell & Josh Teng, 2015. "Estimating the Elasticity of Taxable Income in New Zealand," The Economic Record, The Economic Society of Australia, vol. 91(292), pages 54-78, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Carina Neisser, 2021. "The Elasticity of Taxable Income: A Meta-Regression Analysis [The top 1% in international and historical perspective]," The Economic Journal, Royal Economic Society, vol. 131(640), pages 3365-3391.
    2. Miguel Almunia & David Lopez-Rodriguez, 2019. "The elasticity of taxable income in Spain: 1999–2014," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 10(3), pages 281-320, November.
    3. Michaël Sicsic, 2022. "Does labour income react more to income tax or means‐tested benefits reforms?," Fiscal Studies, John Wiley & Sons, vol. 43(3), pages 291-319, September.
    4. Nicole Bosch, 2019. "The Incidence of Pension Contributions," CPB Discussion Paper 388, CPB Netherlands Bureau for Economic Policy Analysis.
    5. Mavrokonstantis, Panos & Seibold, Arthur, 2022. "Bunching and Adjustment Costs: Evidence from Cypriot Tax Reforms," Journal of Public Economics, Elsevier, vol. 214(C).
    6. Miao, Dingquan & Selin, Håkan & Söderström, Martin, 2022. "Earnings responses to even higher taxes," Working Paper Series 2022:12, IFAU - Institute for Evaluation of Labour Market and Education Policy.
    7. Jakobsen, Katrine Marie & Søgaard, Jakob Egholt, 2022. "Identifying behavioral responses to tax reforms: New insights and a new approach," Journal of Public Economics, Elsevier, vol. 212(C).
    8. Lundberg, Jacob, 2017. "Analyzing tax reforms using the Swedish Labour Income Microsimulation Model," Working Paper Series 2017:12, Uppsala University, Department of Economics.
    9. Nicole Bosch, 2019. "The Incidence of Pension Contributions," CPB Discussion Paper 388.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    10. He, Daixin & Peng, Langchuan & Wang, Xiaxin, 2021. "Understanding the elasticity of taxable income: A tale of two approaches," Journal of Public Economics, Elsevier, vol. 197(C).
    11. Aronsson, Thomas & Jenderny, Katharina & Lanot, Gauthier, 2022. "The quality of the estimators of the ETI," Journal of Public Economics, Elsevier, vol. 212(C).
    12. Derek Messacar, 2022. "Labor Supply Responses to Income Taxation among Older Couples: Evidence from a Canadian Reform," Cahiers de recherche / Working Papers 10, Institut sur la retraite et l'épargne / Retirement and Savings Institute.
    13. Jarkko Harju & Tuomas Matikka, 2016. "The elasticity of taxable income and income-shifting: what is “real” and what is not?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(4), pages 640-669, August.
    14. Panos Mavrokonstantis & Arthur Seibold, 2022. "Bunching and Adjustment Costs: Evidence from Cypriot Tax Reforms," CESifo Working Paper Series 9773, CESifo.
    15. Egbert L. W. Jongen & Maaike Stoel, 2019. "The Elasticity of Taxable Labour Income in the Netherlands," De Economist, Springer, vol. 167(4), pages 359-386, December.
    16. Egbert Jongen & Maaike Stoel, 2016. "The elasticity of taxable income in the Netherlands," CPB Discussion Paper 337, CPB Netherlands Bureau for Economic Policy Analysis.
    17. Tuomas Matikka, 2018. "Elasticity of Taxable Income: Evidence from Changes in Municipal Income Tax Rates in Finland," Scandinavian Journal of Economics, Wiley Blackwell, vol. 120(3), pages 943-973, July.
    18. Doerrenberg, Philipp & Peichl, Andreas & Siegloch, Sebastian, 2017. "The elasticity of taxable income in the presence of deduction possibilities," Journal of Public Economics, Elsevier, vol. 151(C), pages 41-55.
    19. Kosonen, Tuomas & Matikka, Tuomas, 2020. "Discrete Labor Supply: Empirical Evidence and Implications," Working Papers 132, VATT Institute for Economic Research.
    20. Kristoffer Berg & Thor O. Thoresen, 2020. "Problematic response margins in the estimation of the elasticity of taxable income," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(3), pages 721-752, June.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bpj:bejeap:v:20:y:2020:i:2:p:22:n:3. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Peter Golla (email available below). General contact details of provider: https://www.degruyter.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.