The Wage Response to a Reduction in Income Tax Rates: The Israeli Tax Reform

Frish Roni (), Zussman Noam and Igdalov Sophia
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Frish Roni: Bank of Israel, 2 Eliezer Kaplan St, Kiryat Ben Gurion, Jerusalem91007, Israel
Zussman Noam: Bank of Israel, 2 Eliezer Kaplan St, Kiryat Ben Gurion, Jerusalem91007, Israel
Igdalov Sophia: Bank of Israel, 2 Eliezer Kaplan St, Kiryat Ben Gurion, Jerusalem91007, Israel

The B.E. Journal of Economic Analysis & Policy, 2020, vol. 20, issue 2, 22

Abstract: This study examines the effect of an income tax reform on wages. An Israeli reform implemented in 2003–2009 reduced individuals’ marginal income tax rate by 7–17 percentage points. We utilized the differential and non-monotonic marginal tax rate reduction, and used Israel Tax Authority panel data of wage earners, merged with Labor Force Surveys. We found that in the business sector, the elasticity of reported gross wages relative to the net-of-tax rate is about 0.1. The wage earners in the lowest wage quintile were not affected by the tax reform, those in the second and third quintiles did not respond to the tax cut, but elasticity increased with wage, reaching about 0.4 in the upper decile. We did not find statistically significant differences in elasticity by gender, ethnicity, or education.

Keywords: tax reform; elasticity of taxable income; personal tax effect on income (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1515/bejeap-2019-0043

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