How Tax Progression Affects Effort and Employment

Erkki Koskela and Ronnie Schöb ()
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Ronnie Schöb: Free University of Berlin
Authors registered in the RePEc Author Service: Ronnie Schoeb

No 2861, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: Within an efficiency wage framework, we study the effects of two revenue-neutral tax reforms that change the progressivity of the labour tax system. A revenue-neutral increase in both the wage tax and tax exemption and a revenue-neutral change in the composition of labour taxation towards the tax with the smaller tax base will lead to the same results: they moderate wages, workers’ effort, effective labour input and aggregate output. Whether employment rises or falls, however, depends in both reforms on the magnitude of the pre-reform total tax wedge. The larger this tax wedge is, the more negative is the impact of reforms on workers’ effort. A larger total tax wedge increases the negative effect of tax progression on labour productivity and thus thwarts the positive employment effect of wage moderation.

Keywords: tax progression; structure of labour taxation; efficiency wages (search for similar items in EconPapers)
JEL-codes: H22 J41 J48 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2007-06
New Economics Papers: this item is included in nep-acc, nep-lab, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published - published as 'Is Tax Progression Good for Employment? Efficiency Wages and the Role of the Prereform Tax Structure' in: FinanzArchiv, 2009, 65 (1), 51 - 72

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