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Marginal Taxes: A Good or a Bad for Wages?: The Incidence of the Structure of Income and Labor Taxes on Wages

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  • Pia Rattenhuber
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    Abstract

    Empirical evidence so far found ambiguous results for the direction of effect of marginal income tax rates on employee remuneration. Based on the GSOEP data from 2002 through 2008 this study analyzes the impact of the marginal tax load on the employee side on the wage rate also allowing average tax rates and employer payroll taxes to play a role. Instrumental variable estimation based on counterfactual tax rates simulated in a highly detailed microsimulation model (STSM) heals the endogeneity problem of the tax variables with regard to wages. Estimations in first differences show that marginal taxes overall have a negative impact on wages. But this effect is not uniform along the wage distribution; while the negative effect of marginal tax rates prevails in the lower part of the distribution, observations beyond the median benefit from higher tax rates at the margin.

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    File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.394254.de/dp1193.pdf
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    Bibliographic Info

    Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 1193.

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    Length: 34 p.
    Date of creation: 2012
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    Handle: RePEc:diw:diwwpp:dp1193

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    Keywords: Marginal tax rates; tax structure; simulated instrumental variables;

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