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Labour Supply and the Incidence of Income Tax on Wages

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  • Paul Bingley
  • Gauthier Lanot

Abstract

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.

Suggested Citation

  • Paul Bingley & Gauthier Lanot, 1998. "Labour Supply and the Incidence of Income Tax on Wages," Keele Department of Economics Discussion Papers (1995-2001) 98/13, Department of Economics, Keele University, revised Nov 1999.
  • Handle: RePEc:kee:keeldp:98/13
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    File URL: http://www.keele.ac.uk/depts/ec/wpapers/9813.pdf
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    Cited by:

    1. Åsa Hansson & Karin Olofsdotter, 2014. "Labor Taxation and FDI Decisions in the European Union," Open Economies Review, Springer, vol. 25(2), pages 263-287, April.
    2. Azmat, Ghazala Yasmeen, 2006. "The incidence of an earned income tax credit: evaluating the impact on wages in the UK," LSE Research Online Documents on Economics 19859, London School of Economics and Political Science, LSE Library.

    More about this item

    Keywords

    tax incidence; labour supply; matched employer-employee panel data.;

    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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