Taxes and Physicians' Use of Ancillary Health Labor

Recent papers have examined the effect of taxes on the labor supply of high income individuals and on the demand for employee labor; entrepreneurs' decisions to hire workers are seen to be quite sensitive to changes in marginal tax rates. However, little is known about the applicability of these findings to physician services. We posit a straightforward model of physician utility-maximization, where physician-employers jointly choose own work effort and other labor inputs. There is no theoretical prediction about the sign or magnitude of the cross-price effects of changes in physicians' tax rates on their choice of ancillary labor inputs. We estimate the impact of taxation of physician income on both the extensive and intensive margins using state-level variation in marginal income tax rates to identify the effects. We also examine the sensitivity of total and per worker compensation to variation in marginal tax rates.