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

Jakob Munch, Whitta-Jacobson, Hans-Jørgen and Claus Kreiner

No 9275, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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: Tax distortions; Labor mobility; Elasticity of taxable income (search for similar items in EconPapers)
JEL-codes: H21 (search for similar items in EconPapers)
Date: 2013-01
New Economics Papers: this item is included in nep-mig, nep-pbe and nep-pub
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Related works:
Journal Article: Taxation and the long run allocation of labor: Theory and Danish evidence (2015)
Working Paper: Taxation and the Long Run Allocation of Labor: Theory and Danish Evidence (2014)
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