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Labor Income Responds Differently to Income-Tax and Payroll-Tax Reforms

  • Etienne Lehmann
  • François Marical
  • Laurence Rioux

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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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3974.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_3974
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