Beyond the Labour Income Tax Wedge: The Unemployment-Reducing Effect of Tax Progressivity

Etienne Lehmann (), Claudio Lucifora (), Simone Moriconi and Bruno Van der Linden

No 8276, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: In this paper we argue that, for a given overall level of labour income taxation, a more progressive tax schedule increases employment. From a theoretical point of view, higher progressivity increases overall employment through a wage moderating effect and also because employment of low-paid workers is more elastic to wages. We test these theoretical predictions on a panel of 21 OECD countries over 1998-2008. Controlling for the burden of taxation at the average wage, our estimates suggest that a more progressive tax schedule reduces the unemployment rate and increases the employment rate. These findings are confirmed when we account for the potential endogeneity of both average taxation and progressivity. Overall, our results suggest that policy-makers should not only focus on the detrimental effects of tax progressivity on in-work effort, but also consider the employment-enhancing effects.

Keywords: employment; wage moderation; taxation (search for similar items in EconPapers)
JEL-codes: E24 H22 J68 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2014-06
New Economics Papers: this item is included in nep-eur, nep-lab, nep-mac, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Forthcoming - published in: International Tax and Public Finance, 2015, 1-36.

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Related works:
Journal Article: Beyond the labour income tax wedge: the unemployment-reducing effect of tax progressivity (2016)
Working Paper: Beyond the Labour Income Tax Wedge: The Unemployment-Reducing Effect of Tax Progressivity (2013)
Working Paper: Beyond the Labour Income Tax Wedge: The Unemployment-Reducing Effect of Tax Progressivity (2013)
Working Paper: Beyond the Labour Income Tax Wedge: The Unemployment-Reducing Effect of Tax Progressivity (2013)
Working Paper: Beyond the Labour Income Tax Wedge: The Unemployment-Reducing Effect of Tax Progressivity (2013)
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