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Estimating labor supply responses to Danish tax reforms

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  • Sigaard, Hans Schytte

Abstract

This paper estimates the elasticity of labor supply at the intensive margin by applying the latest estimation strategies from the elasticity of taxable income literature to administrative register data on performed hours of work. Performed hours of work are contract hours plus paid overtime, minus paid absence, vacation, and holiday leave. I estimate elasticities of labor supply at the intensive margin (ELS), labor income (ELI), and taxable income (ETI) of 0.08, 0.06, and 0.1. The results show that the high ratio of ELI to ETI can be attributed to changes in labor supply for wage earners, capturing inherent labor responses. As a result, I explicitly connect the labor supply and ETI literatures. The labor supply response is driven by changes in contract hours, paid absence, and individuals switching between main and secondary employment. These results suggest that contextual factors such as labor market fluidity and flexibility are important to facilitate real responses to taxation and that labor supply responses are core underlying drivers of total responses to taxation.

Suggested Citation

  • Sigaard, Hans Schytte, 2023. "Estimating labor supply responses to Danish tax reforms," Journal of Public Economics, Elsevier, vol. 224(C).
    • Handle: RePEc:eee:pubeco:v:224:y:2023:i:c:s0047272723001251
    DOI: 10.1016/j.jpubeco.2023.104943
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    More about this item

    Keywords

    Elasticity of labor supply; Marginal tax rates; Tax reforms; Behavioral responses; Public economics;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J62 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Job, Occupational and Intergenerational Mobility; Promotion

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