Taxation and the Long Run Allocation of Labor: Theory and Danish Evidence

36 Pages Posted: 1 Feb 2013

See all articles by Claus Thustrup Kreiner

Claus Thustrup Kreiner

University of Copenhagen - Department of Economics

Jakob Roland Munch

University of Copenhagen - Department of Economics; Center for Economic and Business Research (CEBR)

Hans Jørgen Whitta-Jacobsen

University of Copenhagen - Department of Economics

Date Written: January 2013

Abstract

Inspired by Hayek (1945), we study the distortionary effects of taxation on labor mobility and the long run allocation of labor across different profitable opportunities. These effects are not well detected by the methods applied in the large public finance literature estimating the elasticity of taxable income and quantifying the welfare loss from taxation. Our analysis builds on a standard search theoretic framework where workers are continually seeking better paid jobs, but are also fired from time to time because of economic development and productivity shocks. We incorporate non-linear taxation into this setting and estimate the structural parameters of the model using employer-employee register based data for the full Danish population of workers and workplaces for the years 2004-2006. Our results indicate that along the intensive margin the Danish taxation generates an overall efficiency loss corresponding to a 12 percent reduction in GDP. It is possible to reap 4/5 of this potential efficiency gain by going from a high-tax Scandinavian system to a level of taxation in line with low-tax OECD countries such as the United States. The tax-responsiveness of labor mobility and allocation corresponds to an elasticity of taxable income with respect to the net-of-tax rate in the range 0.15-0.3.

Keywords: elasticity of taxable income, labor mobility, tax distortions

JEL Classification: H21

Suggested Citation

Kreiner, Claus Thustrup and Munch, Jakob Roland and Whitta-Jacobsen, Hans Jørgen, Taxation and the Long Run Allocation of Labor: Theory and Danish Evidence (January 2013). CEPR Discussion Paper No. DP9275. Available at SSRN: https://ssrn.com/abstract=2210245

Claus Thustrup Kreiner (Contact Author)

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark

Jakob Roland Munch

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark
+45 35323019 (Phone)
+45 35323000 (Fax)

HOME PAGE: http://www.econ.ku.dk/Faculty_And_Staff/showID.asp?profile_id=1260

Center for Economic and Business Research (CEBR)

Porcelaenshaven, Bldg 65
DK-2000 Frederiksberg
Denmark

Hans Jørgen Whitta-Jacobsen

University of Copenhagen - Department of Economics ( email )

Studistraede 6
EPRU
DK 1455 Copenhagen
Denmark
+45 35 32 30 30 (Phone)
+45 35 32 30 00 (Fax)

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