Advanced Search
MyIDEAS: Login

Beyond the Labour Income Tax Wedge: The Unemployment-Reducing Effect of Tax Progressivity

Contents:

Author Info

  • Etienne Lehmann
  • Claudio Lucifora
  • Simone Moriconi
  • Bruno Van der Linden

Abstract

This paper argues that, for a given overall level of labour income taxation, a more progressive tax schedule reduces the unemployment rate and increases the employment rate. From a theoretical point of view, higher progressivity induces a wage-moderation effect and increases overall employment since employment of low-paid workers is more responsive. We test these theoretical predictions on a panel of 21 OECD countries over 1998-2008. Controlling for the burden of taxation at the average wage, we show that a more progressive taxation reduces the unemployment rate and increases the employment rate. These findings are confirmed when we account for the potential endogeneity of both average taxation and progressivity. Overall our results suggest that policy-makers should not only focus on the detrimental effects of tax progressivity on in-work effort.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2013/wp-cesifo-2013-07/cesifo1_wp4348.pdf
Download Restriction: no

Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4348.

as in new window
Length:
Date of creation: 2013
Date of revision:
Handle: RePEc:ces:ceswps:_4348

Contact details of provider:
Postal: Poschingerstrasse 5, 81679 Munich
Phone: +49 (89) 9224-0
Fax: +49 (89) 985369
Email:
Web page: http://www.cesifo.de
More information through EDIRC

Related research

Keywords: wage moderation; employment; taxation;

Other versions of this item:

Find related papers by JEL classification:

References

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.:
as in new window
  1. Edward C. Prescott, 2004. "Why do Americans work so much more than Europeans?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Jul, pages 2-13.
  2. Falk, Martin & Koebel, Bertrand M., 2000. "A dynamic heterogeneous labour demand model for German manufacturing," ZEW Discussion Papers 00-16, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  3. Olivier Blanchard & Justin Wolfers, 1999. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," NBER Working Papers 7282, National Bureau of Economic Research, Inc.
  4. Hersoug, Tor, 1984. "Union Wage Responses to Tax Changes," Oxford Economic Papers, Oxford University Press, vol. 36(1), pages 37-51, March.
  5. R. A. Musgrave & Tun Thin, 1948. "Income Tax Progression, 1929-48," Journal of Political Economy, University of Chicago Press, vol. 56, pages 498.
  6. Alfonso Arpaia & Gilles Mourre, 2012. "Institutions And Performance In European Labour Markets: Taking A Fresh Look At Evidence," Journal of Economic Surveys, Wiley Blackwell, vol. 26(1), pages 1-41, 02.
  7. Pierre Cahuc & André Zylberberg, 2004. "Labor Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 026203316x, December.
  8. Andrea Bassanini & Romain Duval, 2009. "Unemployment, institutions, and reform complementarities: re-assessing the aggregate evidence for OECD countries," Oxford Review of Economic Policy, Oxford University Press, vol. 25(1), pages 40-59, Spring.
  9. Michèle Belot & Jan C. van Ours, 2004. "Does the recent success of some OECD countries in lowering their unemployment rates lie in the clever design of their labor market reforms?," Oxford Economic Papers, Oxford University Press, vol. 56(4), pages 621-642, October.
  10. Etienne, LEHMANN & Alexis, PARMENTIER & Bruno, VAN DER LINDEN, 2008. "Optimal income taxation with endogenous participation and search unemployment," Discussion Papers (ECON - Département des Sciences Economiques) 2008036, Université catholique de Louvain, Département des Sciences Economiques.
  11. Fuest, Clemens & Huber, Bernd, 2000. "Is tax progression really good for employment? A model with endogenous hours of work," Munich Reprints in Economics 20296, University of Munich, Department of Economics.
  12. Pissarides, Christopher A, 1985. "Taxes, Subsidies, and Equilibrium Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 52(1), pages 121-33, January.
  13. Guiso, Luigi & Sapienza, Paola & Zingales, Luigi, 2008. "Long Term Persistence," CEPR Discussion Papers 6981, C.E.P.R. Discussion Papers.
  14. Stéphanie Guichard & Mike Kennedy & Eckhard Wurzel & Christophe André, 2007. "What Promotes Fiscal Consolidation: OECD Country Experiences," OECD Economics Department Working Papers 553, OECD Publishing.
  15. Richard Layard & Stephen Nickell, 1998. "Labour Market Institutions and Economic Performance," CEP Discussion Papers dp0407, Centre for Economic Performance, LSE.
  16. Pissarides, Christopher A., 1998. "The impact of employment tax cuts on unemployment and wages; The role of unemployment benefits and tax structure," European Economic Review, Elsevier, vol. 42(1), pages 155-183, January.
  17. Blundell, Richard & Shephard, Andrew, 2011. "Employment, Hours of Work and the Optimal Taxation of Low Income Families," IZA Discussion Papers 5745, Institute for the Study of Labor (IZA).
  18. Nada Eissa & Jeffrey B. Liebman, 1995. "Labor Supply Response to the Earned Income Tax Credit," NBER Working Papers 5158, National Bureau of Economic Research, Inc.
  19. Giorgio Brunello & Daniela Sonedda, 2007. "Progressive taxation and wage setting when unions strategically interact," Oxford Economic Papers, Oxford University Press, vol. 59(1), pages 127-140, January.
  20. Luca Nunziata, 2001. "Institutions and Wage Determination: a Multi-Country Approach," Economics Series Working Papers 2001-W29, University of Oxford, Department of Economics.
  21. Hansen, Claus Thustrup, 1999. " Lower Tax Progression, Longer Hours and Higher Wages," Scandinavian Journal of Economics, Wiley Blackwell, vol. 101(1), pages 49-65, March.
  22. Hansen, Claus Thustrup & Pedersen, Lars Haagen & Slok, Torsten, 2000. "Ambiguous effects of tax progressivity -- theory and Danish evidence," Labour Economics, Elsevier, vol. 7(3), pages 335-347, May.
  23. Alexis, PARMENTIER, 2006. "The effects of the marginal tax rate in a matching model with endogenous labor supply," Discussion Papers (ECON - Département des Sciences Economiques) 2006011, Université catholique de Louvain, Département des Sciences Economiques.
  24. Sapienza, Paola & Toldra Simats, Anna & Zingales, Luigi, 2007. "Understanding Trust," CEPR Discussion Papers 6462, C.E.P.R. Discussion Papers.
  25. Sorensen, Peter Birch, 1999. "Optimal tax progressivity in imperfect labour markets," Labour Economics, Elsevier, vol. 6(3), pages 435-452, September.
  26. Kramarz, Francis & Philippon, Thomas, 2000. "The Impact of Differential Payroll Tax Subsidies on Minimum Wage Employment," IZA Discussion Papers 219, Institute for the Study of Labor (IZA).
  27. Richard Rogerson, 2008. "Structural Transformation and the Deterioration of European Labor Market Outcomes," Journal of Political Economy, University of Chicago Press, vol. 116(2), pages 235-259, 04.
  28. Alan Manning, 1992. "Wage Bargaining and the Phillips Curve: The Identification and Specification of Aggregate Wage Equations," CEP Discussion Papers dp0062, Centre for Economic Performance, LSE.
  29. Immervoll, Herwig & Kleven, Henrik Jacobsen & Kreiner, Claus Thustrup & Saez, Emmanuel, 2004. "Welfare reform in European countries: a micro-simulation analysis," EUROMOD Working Papers EM1/04, EUROMOD at the Institute for Social and Economic Research.
  30. Fuest, Clemens & Huber, Bernd, 2000. "Is tax progression really good for employment? A model with endogenous hours of work," Labour Economics, Elsevier, vol. 7(1), pages 79-93, January.
  31. Holmlund, B. & Kolm, A.S., 1995. "Progressive Taxation, Wage Setting, and Unemployment , Theory and Swedish Evidence," Papers 1995-15, Uppsala - Working Paper Series.
  32. M. Hashem Pesaran, 2004. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," CESifo Working Paper Series 1331, CESifo Group Munich.
  33. Algan, Yann & Cahuc, Pierre, 2005. "Civic attitudes and the Design of Labor Market Institutions? Which Countries can Implement the Danish Flexicurity Model?," CEPREMAP Working Papers (Docweb) 0517, CEPREMAP.
  34. Stephen Nickell & Luca Nunziata & Wolfgang Ochel, 2005. "Unemployment in the OECD Since the 1960s. What Do We Know?," Economic Journal, Royal Economic Society, vol. 115(500), pages 1-27, 01.
  35. Ardagna, Silvia, 2004. "Fiscal Stabilizations: When Do They Work and Why," Scholarly Articles 2580047, Harvard University Department of Economics.
  36. Lockwood, Ben & Manning, Alan, 1993. "Wage setting and the tax system theory and evidence for the United Kingdom," Journal of Public Economics, Elsevier, vol. 52(1), pages 1-29, August.
  37. Yann Algan & Pierre Cahuc & André Zylberberg, 2002. "Public Employment and Labor Market Performances," Sciences Po publications info:hdl:2441/8846, Sciences Po.
  38. Roed,K. & Strom,S., 1999. "Progressive taxes and the labour market : is the trade-off between equality and efficiency inevitable?," Memorandum 19/1999, Oslo University, Department of Economics.
  39. Francesco Daveri & Guido Tabellini, 2000. "Unemployment, growth and taxation in industrial countries," Economic Policy, CEPR & CES & MSH, vol. 15(30), pages 47-104, 04.
  40. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173.
  41. Doerrenberg, Philipp & Peichl, Andreas, 2010. "Progressive Taxation and Tax Morale," IZA Discussion Papers 5378, Institute for the Study of Labor (IZA).
  42. repec:spo:wpecon:info:hdl:2441/8811 is not listed on IDEAS
  43. Christina D. Romer & David H. Romer, 2010. "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks," American Economic Review, American Economic Association, vol. 100(3), pages 763-801, June.
  44. Hungerbühler, Mathias & Lehmann, Etienne & Parmentier, Alexis & Van der Linden, Bruno, 2005. "Optimal Redistributive Taxation in a Search Equilibrium Model," IZA Discussion Papers 1460, Institute for the Study of Labor (IZA).
  45. Summers, Lawrence H & Gruber, Jonathan & Vergara, Rodrigo, 1993. "Taxation and the Structure of Labor Markets: The Case of Corporatism," The Quarterly Journal of Economics, MIT Press, vol. 108(2), pages 385-411, May.
  46. Yann Algan & Pierre Cahuc & Marc Sangnier, 2014. "Trust and the Welfare State: The Twin Peaks Curve," AMSE Working Papers 1424, Aix-Marseille School of Economics, Marseille, France, revised Jun 2014.
  47. Richard Rogerson, 2006. "Understanding Differences in Hours Worked," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(3), pages 365-409, July.
  48. Rachel Griffith & Rupert Harrison & Gareth Macartney, 2007. "Product Market Reforms, Labour Market Institutions and Unemployment," Economic Journal, Royal Economic Society, vol. 117(519), pages C142-C166, 03.
  49. Heckman, James J, 1993. "What Has Been Learned about Labor Supply in the Past Twenty Years?," American Economic Review, American Economic Association, vol. 83(2), pages 116-21, May.
  50. Diamond, Peter A, 1982. "Wage Determination and Efficiency in Search Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 49(2), pages 217-27, April.
  51. Algan, Yann & Cahuc, Pierre & Sangnier, Marc, 2011. "Efficient and Inefficient Welfare States," CEPR Discussion Papers 8229, C.E.P.R. Discussion Papers.
  52. Eichhorst, Werner & Feil, Michael & Marx, Paul, 2010. "Crisis, What Crisis? Patterns of Adaptation in European Labor Markets," IZA Discussion Papers 5045, Institute for the Study of Labor (IZA).
  53. Bean, C R & Layard, P R G & Nickell, S J, 1986. "The Rise in Unemployment: A Multi-country Study," Economica, London School of Economics and Political Science, vol. 53(210(S)), pages S1-22, Supplemen.
  54. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  55. Rogerson, Richard & Wallenius, Johanna, 2009. "Micro and macro elasticities in a life cycle model with taxes," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2277-2292, November.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. LEHMANN, Etienne & Simula, Laurent & TRANNOY, Alain, 2013. "Tax Me If You Can! Optimal Nonlinear Income Tax between Competing Governments," Working Paper Series, Center for Fiscal Studies 2013:8, Uppsala University, Department of Economics.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_4348. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Julio Saavedra).

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 references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.

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