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Labor Earnings Respond Differently to Income-Tax and to Payroll-Tax Reforms

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Author Info

  • Lehmann, Etienne

    ()
    (CRED, Université Panthéon Assas Paris 2)

  • Marical, François

    ()
    (INSEE)

  • Rioux, Laurence

    ()
    (CREST-INSEE)

Abstract

We estimate the responses of gross labor earnings with respect to marginal and average net-of-tax rates in France over the period 2003-2006. We exploit a series of reforms to the income-tax and the payroll-tax schedules that affect individuals who earn less than twice the minimum wage. Our estimate for the elasticity of gross labor earnings with respect to the marginal net-of-income-tax rate is around 0.2, while we find no response to the marginal net-of-payroll-tax rate. The elasticity with respect to the average net-of-tax rates is not significant for the income-tax schedule, while it is close to -1 for the payroll-tax schedule. A plausible explanation is the existence of significant labor supply responses to the income-tax schedule, combined with a short-term rigidity of the hourly taxable wage (i.e. the gross wage minus payroll taxes), casting doubts about public finance analysis that assumes perfect competition on the labor market. Finally, the effect of the net-of-income-tax rate seems to be driven by labor supply participation decisions, in particular those of females.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 6108.

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Length: 36 pages
Date of creation: Nov 2011
Date of revision:
Publication status: published in: Journal of Public Economics, 2013, 99 (1), 66-84.
Handle: RePEc:iza:izadps:dp6108

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Keywords: labor earnings; payroll tax; income tax;

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References

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  1. Yannick L’Horty & Fabrice Gilles & Matthieu Bunel, 2009. "Les effets des allégements de cotisations sociales sur l’emploi et les salaires : une évaluation de la réforme de 2003," Économie et Statistique, Programme National Persée, vol. 429(1), pages 77-105.
  2. Blomquist, Sören & Selin, Håkan, 2008. "Hourly Wage Rate and Taxable Labor Income Responsiveness to Changes in Marginal Tax Rates," Working Paper Series, Center for Fiscal Studies 2009:1, Uppsala University, Department of Economics.
  3. 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.
  4. Emmanuel Saez & Manos Matsaganis & Panos Tsakloglou, 2010. "Earnings Determination and Taxes: Evidence from a Cohort Based Payroll Tax Reform in Greece," NBER Working Papers 15745, National Bureau of Economic Research, Inc.
  5. A. Kugler, M. Kugler, 2008. "Labour Market Effects of Payroll Taxes in Developing Countries: Evidence from Colombia," Working Papers eg0056, Wilfrid Laurier University, Department of Economics, revised 2008.
  6. Looney, Adam & Kroft, Kory & Chetty, Raj, 2009. "Salience and Taxation: Theory and Evidence," Scholarly Articles 9748525, Harvard University Department of Economics.
  7. Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers dp0110, Centre for Economic Performance, LSE.
  8. Gerald Auten & Robert Carroll, 1999. "The Effect Of Income Taxes On Household Income," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 681-693, November.
  9. Feldstein, Martin, 1995. "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 551-72, June.
  10. Emmanuel Saez & Joel Slemrod & Seth H. Giertz, 2012. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 50(1), pages 3-50, March.
  11. Gruber, Jon & Saez, Emmanuel, 2002. "The elasticity of taxable income: evidence and implications," Journal of Public Economics, Elsevier, vol. 84(1), pages 1-32, April.
  12. Gruber, Jonathan, 1997. "The Incidence of Payroll Taxation: Evidence from Chile," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages S72-101, July.
  13. Hersoug, Tor, 1984. "Union Wage Responses to Tax Changes," Oxford Economic Papers, Oxford University Press, vol. 36(1), pages 37-51, March.
  14. David Sraer & Romain Aeberhardt, 2009. "Allégements de cotisations patronales et dynamique salariale," Économie et Statistique, Programme National Persée, vol. 429(1), pages 177-189.
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Cited by:
  1. Mathieu Bunel & Céline Emond & Yannick L’Horty, 2012. "Évaluer les réformes des exonérations générales de cotisations sociales," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(7), pages 57-103.
  2. Laun, Lisa, 2012. "The effect of age-targeted tax credits on retirement behavior," Working Paper Series 2012:18, IFAU - Institute for Evaluation of Labour Market and Education Policy.

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