Article ID Journal Published Year Pages File Type
969147 Journal of Public Economics 2013 19 Pages PDF
Abstract

We estimate the responses of gross labor income with respect to marginal and average net-of-tax rates in France over the period 2003–2006. We exploit a series of reforms to the income-tax and payroll-tax schedules affecting individuals who earn less than twice the minimum wage. Our estimate for the elasticity of gross labor income with respect to the marginal net-of-income-tax rate is around 0.2, while we find no response to the marginal net-of-payroll-tax rate. The elasticity with respect to the average net-of-tax rate is not significant for the income-tax schedule, while it is close to − 1 for the payroll-tax schedule. A plausible explanation is the existence of significant labor supply responses to the income-tax schedule, combined with sticky posted wages (i.e., the gross labor income minus payroll taxes divided by hours worked). Finally, the effect of the net-of-income-tax rate seems to be driven by participation decisions, in particular those of married women.

► We estimate labor income responses to both payroll-tax and income-tax reforms. ► We find a significant response to the marginal income tax rate around 0.2. ► We do not find a significant response to the marginal payroll tax rate. ► This discrepancy is theoretically consistent with a rigidity of the posted wage rate.

Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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