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

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  • Blomquist, Sören

    ()
    (Uppsala Center for Fiscal Studies)

  • Selin, Håkan

    (Uppsala Center for Fiscal Studies)

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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Bibliographic Info

Paper provided by Uppsala University, Department of Economics in its series Working Paper Series, Center for Fiscal Studies with number 2009:1.

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Length: 31 pages
Date of creation: 19 Nov 2008
Date of revision:
Handle: RePEc:hhs:uufswp:2009_001

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Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
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Web page: http://www.nek.uu.se/
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Keywords: Income taxation; hourly wage rates; work effort; taxable income;

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