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

  • Etienne Lehmann


    (TEPP - Travail, Emploi et Politiques Publiques - CNRS : FR3435 - Université Paris-Est Marne-la-Vallée (UPEMLV), CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique, ERMES - Equipe de recherche sur les marches, l'emploi et la simulation - CNRS : UMR7017 - Université Paris II - Panthéon-Assas)

  • François Marical

    (INSEE - Institut National de la Statistique et des Etudes Economiques - INSEE)

  • Laurence Rioux

    (CREST-INSEE - Centre de Recherche en Economie et en Statistique - Institut national de la statistique et des études économiques (INSEE))

We estimate the responses of gross labor income with respect to marginal and average net-oftax 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 HAL in its series Working Papers with number halshs-00856246.

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Date of creation: 16 Oct 2012
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Handle: RePEc:hal:wpaper:halshs-00856246
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