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The effects of income taxation on severance pay

  • Goerke, Laszlo
  • Pannenberg, Markus

Severance pay often results from a bargain between the firm and the employee to avoid or terminate a legal conflict. We theoretically investigate how income taxation affects these negotiations. Using panel data from West Germany and exploiting a change in tax law in 1999, we find that a higher income tax on severance pay reduces the probability of obtaining it and - in some specifications - also lowers its amount. Our results imply overshifting of the increase in the tax burden.

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Article provided by Elsevier in its journal Labour Economics.

Volume (Year): 16 (2009)
Issue (Month): 1 (January)
Pages: 107-118

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Handle: RePEc:eee:labeco:v:16:y:2009:i:1:p:107-118
Contact details of provider: Web page: http://www.elsevier.com/locate/labeco

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  1. Bauer, Thomas K. & Bender, Stefan & Bonin, Holger, 2004. "Dismissal protection and worker flows in small establishments," IAB Discussion Paper 200401, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
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