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What Do We Work For? An Anatomy of Pre- and Post-Tax Earnings Growth

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  • Frederiksen, Anders

    (Aarhus University)

  • Halliday, Timothy J.

    (University of Hawaii at Manoa)

  • Koch, Alexander K.

    (Aarhus University)

Abstract

Promotions and cross-firm mobility provide substantial gains in earnings – a well established finding based on gross income data. Yet, what matters for incentives is how much an individual can consume or save after taxation. We show that net and gross income growth patterns may differ substantially when a progressive tax system allows for deduction opportunities. Exploiting unique matched employer-employee data with information on tax payments and employee mobility, we find that gross income gains from promotions and cross-firm mobility do not translate into significantly higher net income growth, because employees adjust their tax-shielded consumption and savings (in particular, deductible private pension contributions and mortgage-financed housing) to maintain constant net income growth.

Suggested Citation

  • Frederiksen, Anders & Halliday, Timothy J. & Koch, Alexander K., 2010. "What Do We Work For? An Anatomy of Pre- and Post-Tax Earnings Growth," IZA Discussion Papers 5298, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp5298
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    More about this item

    Keywords

    earnings growth; promotions; mobility; taxable income; dynamic panel data models; matched employer-employee data;
    All these keywords.

    JEL classification:

    • M51 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Firm Employment Decisions; Promotions
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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