A Cross-Country Analysis of the Tax-Push Hypothesis

Fiorella Padoa-Schioppa

No 1992/011, IMF Working Papers from International Monetary Fund

Abstract: This paper presents a microeconomic theoretical model of union optimizing behavior which is then used to test the relevance of the tax-push hypothesis for wage formation in nine Western European countries. Two factors—the compensation and the progressivity effects—are shown by the model to account for the effect (if any) of tax rates on wage formation. A wage equation tested for the period 1960-1988 shows that in general small open economies have negligible compensation and progressivity effects, while in larger economies direct, indirect and social security tax rates are transferred onto the real labor cost. All countries show a weakening of the tax shifting starting at the end of the 1970s or the beginning of the 1980s.

Keywords: WP; direct tax; direct tax tax rate; net real wage; rate estimation; full employment; personal income; rate function; rate equation; rate flat; wage rate; reservation wage; steady state wage equation; indirect tax tax rate; Real wages; Income and capital gains taxes; Average effective tax rate; Wage setting; Progressive taxation; Europe (search for similar items in EconPapers)
Pages: 58
Date: 1992-02-01
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Citations: View citations in EconPapers (5)

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