Does Labor Income React more to Income Tax or Means-Tested Benefit Reforms?

Michaël Sicsic

Working Papers from HAL

Abstract: I provide estimates of the compensated elasticity of labor income with respect to the Marginal Net-of-Tax Rate on the 2006-2015 period for France. I exploit not only income tax reforms but also means-tested benefits reforms. I use semiparametric graphical evidence and a classic 2SLS estimation applied to a rich data set including both financial and sociodemographic variables. I obtain an estimated compensated elasticity around 0.2-0.3 in response to income tax reforms, around 0.1 in response to in-work benefit reforms, while I found no statistically significant response to family allowance reforms. I show that the difference between elasticities contradicts the prediction of the classical labor supply model. One possible explanation is that income tax reforms are more salient and better perceived than benefit reforms. This suggests that benefit reforms may be more efficient in reducing inequalities than income tax reforms due to their lesser behavioral responses. Another contribution is to highlight heterogeneous elasticities depending on income, age, family configuration and education. Results are very robust to a large number of robustness checks, unlike previous studies on the US economy.

Keywords: elasticity of labor income; income tax; means-tested benefit; marginal tax rate (search for similar items in EconPapers)
Date: 2021-02-24
New Economics Papers: this item is included in nep-eur and nep-pbe
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Related works:
Journal Article: Does labour income react more to income tax or means‐tested benefits reforms? (2022)
Working Paper: Does labour income react more to income tax or means-tested benefits reforms? (2022)
Working Paper: Does Labor Income React more to Income Tax or Means-Tested Benefit Reforms? (2020)
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