How Tax Progression Affects Effort and Employment
AbstractWithin an efficiency wage framework, we study the effects of two revenue-neutral tax reforms that change the progressivity of the labour tax system. A revenue-neutral increase in both the wage tax and tax exemption and a revenue-neutral change in the composition of labour taxation towards the tax with the smaller tax base will lead to the same results: they moderate wages, workers’ effort, effective labour input and aggregate output. Whether employment rises or falls, however, depends in both reforms on the magnitude of the pre-reform total tax wedge. The larger this tax wedge is, the more negative is the impact of reforms on workers’ effort. A larger total tax wedge increases the negative effect of tax progression on labour productivity and thus thwarts the positive employment effect of wage moderation.
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Bibliographic InfoPaper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2861.
Length: 27 pages
Date of creation: Jun 2007
Date of revision:
Publication status: published as 'Is Tax Progression Good for Employment? Efficiency Wages and the Role of the Prereform Tax Structure' in: FinanzArchiv, 2009, 65 (1), 51 - 72
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Find related papers by JEL classification:
- H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
- J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
- J48 - Labor and Demographic Economics - - Particular Labor Markets - - - Particular Labor Markets; Public Policy
This paper has been announced in the following NEP Reports:
- NEP-ACC-2007-07-07 (Accounting & Auditing)
- NEP-ALL-2007-07-07 (All new papers)
- NEP-LAB-2007-07-07 (Labour Economics)
- NEP-PBE-2007-07-07 (Public Economics)
- NEP-PUB-2007-07-07 (Public Finance)
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