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Earnings Responses to Even Higher Taxes

Author

Listed:
  • Dingquan Miao
  • Håkan Selin
  • Martin Söderström

Abstract

We exploit a recent Swedish tax reform, implying higher marginal tax rates for the top 5% of the earnings distribution, to learn about earnings responses to higher taxes. Using a simple and graphical cross-sectional method, we estimate an earnings elasticity of 0.16, evaluated four years after the reform. Our analysis indicates that the response is driven by adjustments in wage rates, and not by changes to hours, job switches or income shifting. We interpret the magnitude and preciseness of the response using a realistically calibrated simulation model in which people face uncertain marginal tax rates due to earnings dynamics.

Suggested Citation

  • Dingquan Miao & Håkan Selin & Martin Söderström, 2025. "Earnings Responses to Even Higher Taxes," The Economic Journal, Royal Economic Society, vol. 135(667), pages 838-860.
    • Handle: RePEc:oup:econjl:v:135:y:2025:i:667:p:838-860.
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    File URL: http://hdl.handle.net/10.1093/ej/ueae092
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    Cited by:

    1. is not listed on IDEAS
    2. Bastani, Spencer, 2023. "The marginal cost of public funds: A brief guide," Working Paper Series 2023:14, IFAU - Institute for Evaluation of Labour Market and Education Policy.

    More about this item

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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