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Income Taxes, Gross Hourly Wages, and the Anatomy of Behavioral Responses: Evidence from a Danish Tax Reform

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  • Kazuhiko Sumiya
  • Jesper Bagger

Abstract

This paper provides quasi-experimental evidence on how income taxes affect gross hourly wages, utilizing Danish administrative data and a tax reform that introduced joint taxation. Exploiting spousal income for identification, we present nonparametric, difference-in-differences graphical evidence among husbands. For low-income workers, taxes have negative and dynamic effects on wages; their wage elasticity with respect to net-of-marginal-tax rates is 0.4. For medium-income workers, the effects are smaller and insignificant. Wages respond to taxes through promotions or job-to-job transitions. Neither daily nor annual hours worked respond significantly; consequently, annual earnings respond to taxes primarily through hourly wages, rather than through labor supply.

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  • Kazuhiko Sumiya & Jesper Bagger, 2025. "Income Taxes, Gross Hourly Wages, and the Anatomy of Behavioral Responses: Evidence from a Danish Tax Reform," Papers 2510.16483, arXiv.org.
    • Handle: RePEc:arx:papers:2510.16483
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