Labour force participation elasticities and the move away from a flat tax: the case of Slovakia

Matus Senaj,Jana Valachyova,Norbert Svarda,Zuzana Siebertova

doi:10.1186/s40174-016-0069-y

Matus Senaj, Jana Valachyova + Show 2 more

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https://doi.org/10.1186/s40174-016-0069-y

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Abstract

This paper provides a microeconometric analysis of labour force participation elasticities in Slovakia where we study the elasticity with respect to a unique tax reform whereby the flat tax was backtracked and replaced by a progressive tax. By estimating a probability model for labour force participation, we show that the low-skilled and females are groups that are particularly responsive to changes in income taxes and transfers. We perform a microsimulation analysis of two scenarios of flat-tax regime abolishment. We find that the recent departure from the flat-tax system in Slovakia in 2013, which introduced two tax brackets in personal income taxation, only negligibly reduced the average probability of being economically active at the extensive margin. A more significant average effect has been found in a hypothetical scenario with a similar fiscal revenue impact, simulating a departure from the flat-tax system by reintroducing five tax brackets. We show the different impacts of the two distinct scenarios of abolishing the flat tax on selected subgroups of the population. JEL Classification: H31, H53, I38, J21

Highlights

This paper examines the link between labour force participation and changes in the tax system
The way how labour force participation responds to the work incentive/disincentive effects of taxation and welfare programmes has attracted a lot of interest in both labour and public economics, and extensive research has resulted in numerous empirical results
6.1 Labour force participation elasticities Equipped with the vectors of gains to work logGTW and non-labour income logNY that are constructed using a microsimulation model, we estimate the probit model of labour force participation decision given by Eq (9)

Summary

Introduction

This paper examines the link between labour force participation and changes in the tax system. As argued by Meghir and Phillips (2010), the impact of taxation on work incentives is one of the principal sources of inefficiency that may arise in a tax system. The fundamental issue is to assess how sensitive individuals’ work incentives are to changes in taxes and benefits. The way how labour force participation responds to the work incentive/disincentive effects of taxation and welfare programmes has attracted a lot of interest in both labour and public economics, and extensive research has resulted in numerous empirical results. For an overview of the literature that connects labour supply to income taxes and social benefits, see, among others, surveys by Meghir and Phillips (2010), Moffitt (2002), and Blundell and MaCurdy (1999)

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