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Income Taxes and the Composition of Pay

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Author Info
Giorgio Brunello () (University of Padova, CESifo and IZA Bonn)
Simona Comi () (University of Milano Bicocca)
Daniela Sonedda () (University of Piemonte Orientale and CRENoS)

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Abstract

According to the standard principal-agent model, the optimal composition of pay should balance the provision of incentives with the individual demand for insurance. Do income taxes alter this balance? We show that the relative share of PRP on total pay is reduced by higher average taxes, and is affected in a complex way by higher marginal tax rates. Empirical evidence based on the British Household Panel Survey, which exploits the UK 1999 Tax Reform, supports the theoretical predictions of the tax-augmented principal-agent model.

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File URL: ftp://repec.iza.org/RePEc/Discussionpaper/dp2203.pdf
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Publisher Info
Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2203.

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Length: 28 pages
Date of creation: Jul 2006
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Handle: RePEc:iza:izadps:dp2203

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Related research
Keywords: performance related pay; income taxes;

Find related papers by JEL classification:
J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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This page was last updated on 2009-11-30.

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