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Income Taxes and the Composition of Pay
Giorgio Brunello University of Padua - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Institute for the Study of Labor (IZA) Simona Comi University of Milan Daniela Sonedda University College London - Department of Economics; Universita degli Studi del Piemonte Orientale "Amedeo Avogadro" - Dipartimento di Scienze Economiche e Metodi Quantitativi July 2006 IZA Discussion Paper No. 2203 Abstract: According to the standard principal-agent model, the optimal composition of pay should balance the provision of incentives with the individual demand for insurance. Do income taxes alter this balance? We show that the relative share of PRP on total pay is reduced by higher average taxes, and is affected in a complex way by higher marginal tax rates. Empirical evidence based on the British Household Panel Survey, which exploits the UK 1999 Tax Reform, supports the theoretical predictions of the tax-augmented principal-agent model.
Keywords: performance related pay, income taxes JEL Classifications: J33, H24 Working Paper SeriesDate posted: July 31, 2006 ; Last revised: July 31, 2006Suggested CitationContact Information
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