IDEAS home Printed from https://ideas.repec.org/p/iza/izadps/dp2861.html
   My bibliography  Save this paper

How Tax Progression Affects Effort and Employment

Author

Listed:
  • Koskela, Erkki

    (University of Helsinki)

  • Schöb, Ronnie

    (Free University of Berlin)

Abstract

Within an efficiency wage framework, we study the effects of two revenue-neutral tax reforms that change the progressivity of the labour tax system. A revenue-neutral increase in both the wage tax and tax exemption and a revenue-neutral change in the composition of labour taxation towards the tax with the smaller tax base will lead to the same results: they moderate wages, workers’ effort, effective labour input and aggregate output. Whether employment rises or falls, however, depends in both reforms on the magnitude of the pre-reform total tax wedge. The larger this tax wedge is, the more negative is the impact of reforms on workers’ effort. A larger total tax wedge increases the negative effect of tax progression on labour productivity and thus thwarts the positive employment effect of wage moderation.

Suggested Citation

  • Koskela, Erkki & Schöb, Ronnie, 2007. "How Tax Progression Affects Effort and Employment," IZA Discussion Papers 2861, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp2861
    as

    Download full text from publisher

    File URL: https://docs.iza.org/dp2861.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Koskela Erkki & Schöb Ronnie, 2002. "Why Governments Should Tax Mobile Capital in the Presence of Unemployment," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 1(1), pages 1-22, January.
    2. Heijdra, Ben J. & Ligthart, Jenny E., 2004. "Labor tax reform and equilibrium unemployment: a search and matching approach," CCSO Working Papers 200409, University of Groningen, CCSO Centre for Economic Research.
    3. Pissarides, Christopher A., 1998. "The impact of employment tax cuts on unemployment and wages; The role of unemployment benefits and tax structure," European Economic Review, Elsevier, vol. 42(1), pages 155-183, January.
    4. Laszlo Goerke, 1999. "Efficiency Wages and Taxes," Australian Economic Papers, Wiley Blackwell, vol. 38(2), pages 131-142, June.
    5. Goerke, Laszlo, 1999. "Efficiency Wages and Taxes," Australian Economic Papers, Wiley Blackwell, vol. 38(2), pages 131-142, June.
    6. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
    7. Koskela, Erkki & Schob, Ronnie, 1999. "Does the composition of wage and payroll taxes matter under Nash bargaining?," Economics Letters, Elsevier, vol. 64(3), pages 343-349, September.
    8. Solow, Robert M., 1979. "Another possible source of wage stickiness," Journal of Macroeconomics, Elsevier, vol. 1(1), pages 79-82.
    9. Michael Hoel, 1990. "Efficiency wages and income taxes," Journal of Economics, Springer, vol. 51(1), pages 89-99, February.
    10. Pierre M. Picard & Eric Toulemonde, 2003. "Taxation and Labor Markets," Journal of Economics, Springer, vol. 78(1), pages 29-56, January.
    11. Koskela, Erkki & Vilmunen, Jouko, 1996. "Tax progression is good for employment in popular models of trade union behaviour," Labour Economics, Elsevier, vol. 3(1), pages 65-80, August.
    12. Sorensen, Peter Birch, 1999. "Optimal tax progressivity in imperfect labour markets," Labour Economics, Elsevier, vol. 6(3), pages 435-452, September.
    13. R. A. Musgrave & Tun Thin, 1948. "Income Tax Progression, 1929-48," Journal of Political Economy, University of Chicago Press, vol. 56, pages 498-498.
    14. Andersen, Torben M. & Sandemann Rasmussen, Bo, 1999. "Effort, taxation and unemployment1," Economics Letters, Elsevier, vol. 62(1), pages 97-103, January.
    15. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Primož Dolenc & Suzana Laporšek, 2012. "Taxing wages and sustainable labour market performance: empirical evidence from OECD and EU countries," International Journal of Sustainable Economy, Inderscience Enterprises Ltd, vol. 4(3), pages 234-253.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Martin Weiss, 2009. "Higher Tax Rates on Labor? Evidence from German Panel Data," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 65(1), pages 73-92, March.
    2. Erkki Koskela & Ronnie Schöb, 2012. "Tax Progression under Collective Wage Bargaining and Individual Effort Determination," Industrial Relations: A Journal of Economy and Society, Wiley Blackwell, vol. 51(3), pages 749-771, July.
    3. José Ramón García & José Vicente Ríos, 2004. "Effects Of Tax Reforms In A Shirking Model With Union Bargaining," Working Papers. Serie AD 2004-42, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    4. Laszlo Goerke, 2003. "Tax Progressivity and Tax Evasion," CESifo Working Paper Series 1097, CESifo.
    5. Goerke, Laszlo, 1999. "Value-added Tax versus Social Security Contributions," IZA Discussion Papers 55, Institute of Labor Economics (IZA).
    6. Pekka Sinko, 2007. "Labour taxation, job creation and job destruction—Focusing on the role of wage setting," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 14(5), pages 583-604, October.
    7. Laszlo Goerke, 2000. "The Wedge," Manchester School, University of Manchester, vol. 68(5), pages 608-623, September.
    8. Sorensen, Peter Birch, 1999. "Optimal tax progressivity in imperfect labour markets," Labour Economics, Elsevier, vol. 6(3), pages 435-452, September.
    9. Bo Sandemann Rasmussen, "undated". "Efficiency Wages and the Long-Run Incidence of Progressive Taxation," Economics Working Papers 2001-5, Department of Economics and Business Economics, Aarhus University.
    10. Holmlund, Bertil & Söderström, Martin, 2007. "Estimating Income Responses to Tax Changes: A Dynamic Panel Data Approach," IZA Discussion Papers 3088, Institute of Labor Economics (IZA).
    11. Bohringer, Christoph & Boeters, Stefan & Feil, Michael, 2005. "Taxation and unemployment: an applied general equilibrium approach," Economic Modelling, Elsevier, vol. 22(1), pages 81-108, January.
    12. Holmlund Bertil & Söderström Martin, 2011. "Estimating Dynamic Income Responses to Tax Reform," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-38, November.
    13. Holmlund, Bertil & Söderström, Martin, 2008. "Estimating dynamic income responses to tax reforms: Swedish evidence," Working Paper Series 2008:28, IFAU - Institute for Evaluation of Labour Market and Education Policy.
    14. Frederick Van der Ploeg, 2004. "The Welfare State, Redistribution and the Economy, Reciprocal Altruism, Consumer Rivalry and Second Best," CESifo Working Paper Series 1234, CESifo.
    15. John P. Hutton & Anna Ruocco, "undated". "Can Tax Progression Raise Employment? A Study of Four European Countries," Discussion Papers 99/21, Department of Economics, University of York.
    16. Houben, Henriette & Baumgarten, Jörg, 2011. "Krankt das deutsche Steuersystem am Mittelstandsbauch und der kalten Progession?," arqus Discussion Papers in Quantitative Tax Research 119, arqus - Arbeitskreis Quantitative Steuerlehre.
    17. Jon Strand, 2002. "Effects of Progressive Taxes under Decentralized Bargaining and Heterogeneous Labor," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 9(2), pages 195-210, March.
    18. Goerke, Laszlo, 2004. "Tax evasion, tax progression, and efficiency wages," Economics Letters, Elsevier, vol. 82(1), pages 35-42, January.
    19. Boeters, Stefan, 2011. "Optimal tax progressivity in unionised labour markets: What are the driving forces?," Economic Modelling, Elsevier, vol. 28(5), pages 2282-2295, September.
    20. Bertil Holmlund, 2002. "Labor Taxation in Search Equilibrium with Home Production," German Economic Review, Verein für Socialpolitik, vol. 3(4), pages 415-430, November.

    More about this item

    Keywords

    tax progression; structure of labour taxation; efficiency wages;
    All these keywords.

    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J48 - Labor and Demographic Economics - - Particular Labor Markets - - - Particular Labor Markets; Public Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:iza:izadps:dp2861. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Holger Hinte (email available below). General contact details of provider: https://edirc.repec.org/data/izaaade.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.