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Labour Supply and the Incidence of Income Tax on Wages

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  • Paul Bingley
  • Gauthier Lanot

Abstract

In the simple framework of a static model for equilibrium wages and labour supplies, we show that the incidence of income tax on equilibrium wages can be measured independently from the individual labour supply elasticity. This extends recent work by Blundell, Duncan and Meghir (1998) and Eissa and Liebman (1996), who estimate labour supply elasticities, and Gruber (1997), who estimates tax incidence on earnings. Our measurements are based on a large multi-level longitudinal data set of Danish private sector establishments and workers. We show that, allowing for labour supply response, there is strong evidence for partial shifting of the burden of income tax from worker to employer. Higher marginal tax rates are associated with increases in gross wages and earnings.

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File URL: http://www.keele.ac.uk/depts/ec/wpapers/9813.pdf
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Bibliographic Info

Paper provided by Department of Economics, Keele University in its series Keele Department of Economics Discussion Papers (1995-2001) with number 98/13.

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Date of creation: 1998
Date of revision: Nov 1999
Publication status: Published in Journal of Public Economics, February 2002, Vol 83, pages 173-194.
Handle: RePEc:kee:keeldp:98/13

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Postal: Department of Economics, University of Keele, Keele, Staffordshire, ST5 5BG - United Kingdom
Phone: +44 (0)1782 584581
Fax: +44 (0)1782 717577
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Web page: http://www.keele.ac.uk/depts/ec/cer/
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Postal: Department of Economics, Keele University, Keele, Staffordshire ST5 5BG - United Kingdom
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Web: http://www.keele.ac.uk/depts/ec/cer/pubs_kerps.htm

Related research

Keywords: tax incidence; labour supply; matched employer-employee panel data.;

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Cited by:
  1. Åsa Hansson & Karin Olofsdotter, 2014. "Labor Taxation and FDI Decisions in the European Union," Open Economies Review, Springer, vol. 25(2), pages 263-287, April.
  2. Ghazala Azmat, 2006. "The Incidence of an Earned Income Tax Credit: Evaluating the Impact on Wages in the UK," CEP Discussion Papers dp0724, Centre for Economic Performance, LSE.
  3. Ghazala Yasmeen Azmat, 2006. "The incidence of an earned income tax credit: evaluating the impact on wages in the UK," LSE Research Online Documents on Economics 19859, London School of Economics and Political Science, LSE Library.

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