Income Taxes and the Composition of Pay

Giorgio Brunello, Simona Comi and Daniela Sonedda

No 2203, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: According to the standard principal-agent model, the optimal composition of pay should balance the provision of incentives with the individual demand for insurance. Do income taxes alter this balance? We show that the relative share of PRP on total pay is reduced by higher average taxes, and is affected in a complex way by higher marginal tax rates. Empirical evidence based on the British Household Panel Survey, which exploits the UK 1999 Tax Reform, supports the theoretical predictions of the tax-augmented principal-agent model.

Keywords: performance related pay; income taxes (search for similar items in EconPapers)
JEL-codes: H24 J33 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2006-07
New Economics Papers: this item is included in nep-pbe and nep-pub
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Citations: View citations in EconPapers (3)

Published - published as 'Income Taxes and the Composition of Pay: Evidence from the British Household Panel Survey' in: Scottish Journal of Political Economy, 2011, 58 (3), 297 - 322

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