What do We Work for? An Anatomy of Pre- and Post-Tax Earnings Growth

25 Pages Posted: 14 Nov 2010

See all articles by Anders Frederiksen

Anders Frederiksen

IZA Institute of Labor Economics

Timothy Halliday

University of Hawaii - Department of Economics; IZA Institute of Labor Economics

Alexander K. Koch

University of Aarhus - Department of Economics and Business Economics; IZA Institute of Labor Economics

Abstract

Promotions and cross-firm mobility provide substantial gains in earnings ヨ a well established finding based on gross income data. Yet, what matters for incentives is how much an individual can consume or save after taxation. We show that net and gross income growth patterns may differ substantially when a progressive tax system allows for deduction opportunities. Exploiting unique matched employer-employee data with information on tax payments and employee mobility, we find that gross income gains from promotions and cross-firm mobility do not translate into significantly higher net income growth, because employees adjust their tax-shielded consumption and savings (in particular, deductible private pension contributions and mortgage-financed housing) to maintain constant net income growth.

Keywords: earnings growth, promotions, mobility, taxable income, dynamic panel data models, matched employer-employee data

JEL Classification: M51, J6, C33, H31

Suggested Citation

Frederiksen, Anders and Halliday, Timothy and Koch, Alexander K., What do We Work for? An Anatomy of Pre- and Post-Tax Earnings Growth. IZA Discussion Paper No. 5298. Available at SSRN: https://ssrn.com/abstract=1708744

Anders Frederiksen (Contact Author)

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Timothy Halliday

University of Hawaii - Department of Economics ( email )

Honolulu, HI 96822
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Alexander K. Koch

University of Aarhus - Department of Economics and Business Economics ( email )

Fuglesangs Allé 4
Aarhus V, 8210
Denmark

HOME PAGE: http://https://sites.google.com/site/alexanderkkoch/Home

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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