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Hourly Wage Rate and Taxable Labor Income Responsiveness to Changes in Marginal Tax Rates

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Author Info
Sören Blomquist ()
Håkan Selin ()
Abstract

Recently, a voluminous literature estimating the taxable income elasticity has emerged as an important field in empirical public economics. However, to a large extent it is still unknown how the hourly wage rate, an important component of taxable income, reacts to changes in marginal tax rates. In this study we use a rich panel data set and a sequence of tax reforms that took place in Sweden during the 1980’s to estimate the elasticity of the hourly wage rate with respect to the net-of-tax rate. While carefully accounting for the endogeneity of marginal tax rates as well as other factors that determine wage rates we do find a statistically significant response both among married men and married women. The hourly wage rate elasticity with respect to the net-of-tax rate is estimated to 0.14-0.16 for males and 0.41-0.57 for females. In addition, we obtain uncompensated taxable labor income elasticities of around 0.21 for men and 0.96-1.44 for women. In contrast to earlier studies, we also find significant income effects for males. Accordingly, for males the compensated taxable labor income elasticity is about 4 percentage points higher than the uncompensated one.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 2644.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2644

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Related research
Keywords: income taxation; hourly wage rates; work effort; taxable income;

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Find related papers by JEL classification:
H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Martin Feldstein, 1999. "Tax Avoidance And The Deadweight Loss Of The Income Tax," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 674-680, November. [Downloadable!] (restricted)
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  2. Sillamaa, Mary-Anne & Veall, Michael R., 2001. "The effect of marginal tax rates on taxable income: a panel study of the 1988 tax flattening in Canada," Journal of Public Economics, Elsevier, vol. 80(3), pages 341-356, June. [Downloadable!] (restricted)
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  3. Slemrod, Joel & Kopczuk, Wojciech, 2002. "The optimal elasticity of taxable income," Journal of Public Economics, Elsevier, vol. 84(1), pages 91-112, April. [Downloadable!] (restricted)
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  4. Giertz, Seth, 2004. "Recent Literature on Taxable-Income Elasticities," MPRA Paper 16159, University Library of Munich, Germany. [Downloadable!]
  5. 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 551-72, June. [Downloadable!] (restricted)
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  6. Blomquist, N. Soren, 1988. "Nonlinear taxes and labor supply," European Economic Review, Elsevier, vol. 32(6), pages 1213-1226, July. [Downloadable!] (restricted)
  7. Blomquist, N Soren, 1979. " Wage Rates and Personal Characteristics," Scandinavian Journal of Economics, Blackwell Publishing, vol. 81(4), pages 505-20.
  8. 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. [Downloadable!] (restricted)
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  9. Heim, Bradley T. & Meyer, Bruce D., 2004. "Work costs and nonconvex preferences in the estimation of labor supply models," Journal of Public Economics, Elsevier, vol. 88(11), pages 2323-2338, September. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Emmanuel Saez & Joel B. Slemrod & Seth H. Giertz, 2009. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," NBER Working Papers 15012, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Stergios Skaperdas, 2009. "The Costs of Organized Violence: A Review of the Evidence," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  3. Axel Dreher & Justina A.V. Fischer, 2009. "Government Decentralization as a Disincentive for Transnational Terror? An Empirical Analysis," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
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This page was last updated on 2009-11-3.

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