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Labor income responds differently to income-tax and payroll-tax reforms

  • Lehmann, Etienne
  • Marical, François
  • Rioux, Laurence

We estimate the responses of gross labor income 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 payroll-tax schedules affecting individuals who earn less than twice the minimum wage. Our estimate for the elasticity of gross labor income 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 rate 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 sticky posted wages (i.e., the gross labor income minus payroll taxes divided by hours worked). Finally, the effect of the net-of-income-tax rate seems to be driven by participation decisions, in particular those of married women.

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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 99 (2013)
Issue (Month): C ()
Pages: 66-84

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Handle: RePEc:eee:pubeco:v:99:y:2013:i:c:p:66-84
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505578

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