Progressive Taxation and Wage Setting: Some Evidence for Denmark
This paper investigates the proposition that a progressive tax system contributes to wage moderation. We continue the work of Lockwood and Manning (1993), who considered macro date for the UK, by looking at Danish wage equations for different earnings levels. Our main conclusions are that income-tax progression affects wage setting, but whether it moderates or exaggerates wage pressure is income dependent. For the main middle-income groups (blue-collar men and moderate income earners among both male and female white-collar workers) an increase in progressivity reduces the pre-tax wages, whereas for the high- and low-income earners (male white collar and female workers, respectively) this is not the case. In fact for the high-income earners an increase in progressivity increases the pre-tax wages. Furthermore, our analysis suggests that changes in tax progression may explain changes in wage differentials.
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