Labour Supply and the Incidence of Income Tax on Wages
In the simple framework of a static model for equilibrium wages and labour supplies, we show that the incidence of income tax on equilibrium wages can be measured independently from the individual labour supply elasticity. This extends recent work by Blundell, Duncan and Meghir (1998) and Eissa and Liebman (1996), who estimate labour supply elasticities, and Gruber (1997), who estimates tax incidence on earnings. Our measurements are based on a large multi-level longitudinal data set of Danish private sector establishments and workers. We show that, allowing for labour supply response, there is strong evidence for partial shifting of the burden of income tax from worker to employer. Higher marginal tax rates are associated with increases in gross wages and earnings.
|Date of creation:||1998|
|Date of revision:||Nov 1999|
|Publication status:||Published in Journal of Public Economics, February 2002, Vol 83, pages 173-194.|
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|Order Information:|| Postal: Department of Economics, Keele University, Keele, Staffordshire ST5 5BG - United Kingdom|
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