It takes two to tango: Labour responses to an income tax holiday in Argentina

Dario Tortarolo, Guillermo Cruces and Victoria Castillo

No 2020-07, Discussion Papers from Nottingham Interdisciplinary Centre for Economic and Political Research (NICEP)

Abstract: We exploit a large, quasi-randomized, 2.5-year-long income tax holiday to identify intertemporal labor responses of high-wage earners to net wage changes. In August 2013, the Argentine government exempted a group of wage earners from the income tax for 2.5 years while leaving in place the tax on other high-wage earners. Eligibility was based on whether past wage earnings were below a fixed threshold, thus levying sharply different marginal and average tax rates—effectively 0% for workers below the threshold. Using rich population-wide administrative data and a regression discontinuity design, we estimate a precise and very small wage earnings elasticity of 0.017 for this large, salient, and temporary income tax change. Responses are larger for more flexible outcomes (overtime hours) and for more elastic groups (job switchers and managers). We also find avoidance responses from new entrants who faced no tax if their first monthly wage was below the fixed threshold. This strategic entry below the threshold to dodge taxes required coordination with employers. Our findings indicate rigidities in the labor market that require employer-employee cooperation to be overcome for wage earners to be able to respond to tax changes.

Keywords: tax credits; family allowances; means-tested transfers; incidence; event study (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-pub
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Citations: View citations in EconPapers (6)

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