Income Taxes and the Composition of Pay

Brunello, Giorgio; Comi, Simona; Sonedda, Daniela

doi:10.2139/ssrn.920643

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Income Taxes and the Composition of Pay

IZA Discussion Paper No. 2203

28 Pages Posted: 31 Jul 2006

See all articles by Giorgio Brunello

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)

Daniela Sonedda

University College London - Department of Economics; Universita degli Studi del Piemonte Orientale "Amedeo Avogadro" - Dipartimento di Scienze Economiche e Metodi Quantitativi

Date Written: July 2006

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 Classification: J33, H24

Suggested Citation: Suggested Citation

Brunello, Giorgio and Comi, Simona and Sonedda, Daniela, Income Taxes and the Composition of Pay (July 2006). IZA Discussion Paper No. 2203, Available at SSRN: https://ssrn.com/abstract=920643 or http://dx.doi.org/10.2139/ssrn.920643