Hourly Wage Rate and Taxable Labor Income Responsiveness to Changes in Marginal Tax Rates

36 Pages Posted: 7 May 2009

See all articles by Soren Blomquist

Soren Blomquist

Uppsala University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Hakan Selin

Uppsala University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: May 1, 2009

Abstract

Recently, a voluminous literature estimating the taxable income elasticity has emerged as an important field in empirical public economics. However, to a large extent it is still unknown how the hourly wage rate, an important component of taxable income, reacts to changes in marginal tax rates. In this study we use a rich panel data set and a sequence of tax reforms that took place in Sweden during the 1980’s to estimate the elasticity of the hourly wage rate with respect to the net-of-tax rate. While carefully accounting for the endogeneity of marginal tax rates as well as other factors that determine wage rates we do find a statistically significant response both among married men and married women. The hourly wage rate elasticity with respect to the net-of-tax rate is estimated to 0.14-0.16 for males and 0.41-0.57 for females. In addition, we obtain uncompensated taxable labor income elasticities of around 0.21 for men and 0.96-1.44 for women. In contrast to earlier studies, we also find significant income effects for males. Accordingly, for males the compensated taxable labor income elasticity is about 4 percentage points higher than the uncompensated one.

Keywords: income taxation, hourly wage rates, work effort, taxable income

JEL Classification: H24, J22, J31

Suggested Citation

Blomquist, Soren and Selin, Hakan, Hourly Wage Rate and Taxable Labor Income Responsiveness to Changes in Marginal Tax Rates (May 1, 2009). CESifo Working Paper Series No. 2644, Available at SSRN: https://ssrn.com/abstract=1400650 or http://dx.doi.org/10.2139/ssrn.1400650

Soren Blomquist

Uppsala University - Department of Economics ( email )

Box 513
SE-75120 Uppsala
Sweden
+46 18 471 1102 (Phone)
+46 18 471 1478 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Hakan Selin (Contact Author)

Uppsala University - Department of Economics ( email )

Box 513
SE-75120 Uppsala
Sweden

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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