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Taxation and the Long Run Allocation of Labor: Theory and Danish Evidence

Author

Listed:
  • Kreiner, Claus Thustrup

    () (University of Copenhagen)

  • Munch, Jakob R.

    () (University of Copenhagen)

  • Whitta-Jacobsen, Hans Jørgen

    () (University of Copenhagen)

Abstract

Inspired by Hayek (1945), we study the distortionary effects of taxation on labor mobility and the long run allocation of labor across different profitable opportunities. These effects are not well detected by the methods applied in the large public finance literature estimating the elasticity of taxable income and quantifying the efficiency loss from taxation. Our analysis builds on a standard search theoretic framework where workers are continually seeking better paid jobs, but are also fired from time to time because of economic development and productivity shocks. We incorporate non-linear taxation into this setting and estimate the structural parameters of the model using employer-employee register based data for the full Danish population of workers and workplaces for the years 2004-2006. Our results indicate that along the intensive margin the Danish taxation generates an overall efficiency loss corresponding to a 12 percent reduction in total income. It is possible to reap 4/5 of this potential efficiency gain by going from a high-tax Scandinavian system to a level of taxation in line with low-tax OECD countries such as the United States. The tax-responsiveness of labor mobility and allocation corresponds to an elasticity of taxable income with respect to the net-of-tax rate in the range 0.15-0.35.

Suggested Citation

  • Kreiner, Claus Thustrup & Munch, Jakob R. & Whitta-Jacobsen, Hans Jørgen, 2014. "Taxation and the Long Run Allocation of Labor: Theory and Danish Evidence," IZA Discussion Papers 8246, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp8246
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    References listed on IDEAS

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    Cited by:

    1. Lundberg, Jacob, 2017. "Analyzing tax reforms using the Swedish Labour Income Microsimulation Model," Working Paper Series 2017:12, Uppsala University, Department of Economics.

    More about this item

    Keywords

    elasticity of taxable income; labor mobility; tax distortions;

    JEL classification:

    • J62 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Job, Occupational and Intergenerational Mobility; Promotion
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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