Taxes, Wages and Working Hours

39 Pages Posted: 4 Sep 2011

See all articles by Peter Ericson

Peter Ericson

Goeteborg University - School of Business, Economics and Law; Ministry of Finance

Lennart Flood

Goeteborg University - School of Business, Economics and Law; IZA Institute of Labor Economics

Abstract

This paper presents estimates of individuals' responses in hourly wages to changes in marginal tax rates. Estimates based on register panel data of Swedish households covering the period 1992 to 2007 produce significant but relatively small net-of-tax rate elasticities. The results vary with family type, with the largest elasticities obtained for single males and the smallest for married/cohabitant females. Despite these seemingly small elasticities, evaluation of the effects of a reduced state tax using a microsimulation model shows that the effort effect matters. The largest effect is due to changes in number of working hours yet including the effort effect results in an almost self-financed reform. As a reference to the earlier literature we also estimate taxable income elasticities. As expected, these are larger than for the hourly wage rates. However, both specifications produce significantly and positive income effects.

Keywords: income taxation, hourly wage rates, work effort, micro simulation

JEL Classification: C8, D31, H24, J22, J31

Suggested Citation

Ericson, Peter and Flood, Lennart, Taxes, Wages and Working Hours. IZA Discussion Paper No. 5930, Available at SSRN: https://ssrn.com/abstract=1921981

Peter Ericson (Contact Author)

Goeteborg University - School of Business, Economics and Law ( email )

Box 640
SE 405 30 Goeteborg
Sweden

Ministry of Finance

Drottinggatan 21
Stockholm 10333
Sweden

Lennart Flood

Goeteborg University - School of Business, Economics and Law ( email )

Box 640
SE 405 30 Goeteborg
Sweden
+46 31 773 1331 (Phone)
+46 31 773 1043 (Fax)

IZA Institute of Labor Economics

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

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