Average Taxes Research Articles

Migration Incentives and Taxation: Do Marginal Taxes Matter?

Faced with ageing populations many European countries may be tempted to attract immigrants. One way to do this is to offer tax incentives. Since the decision to migrate is a discrete choice it should be average taxes that are important for the migration decision. If, however, the supply of working hours is endogenous it is shown that marginal taxes are also important for the migration decision, even after controlling for average taxes. Hence, countries interested in attracting immigrants can do so even without reducing average taxes by having less progressive tax systems than other countries.

Union wage setting and progressive income taxation with heterogeneous labor: theory and evidence from the German income tax reforms 1986–1990

This paper analyzes the effects of tax shifting in a model with union wage setting and progressive income taxation. The setup allows for different skill levels of the workforce and accounts for the union's distributional objective of income equality. The theoretical predictions of the model are empirically tested with a panel of German micro-data covering the period of the income tax reforms 1986–1990. It is shown that average taxes raise wages, whereas increasing the progressivity of the tax system reduces wages. The effect of progressivity on high-skilled labor tends to be less significant and smaller. Stronger preferences for equality compress the (pre-tax) wage distribution.

Migration Incentives and Taxation: Do Marginal Taxes Matter?

Faced with ageing populations many European countries may be tempted to attract immigrants. One way to do this is to offer tax incentives. Since the decision to migrate is a discrete choice it should be average taxes that are important for the migration decision. If, however, the supply of working hours is endogenous it is shown that marginal taxes are also important for the migration decision, even after controlling for average taxes. Hence, countries interested in attracting immigrants can do so even without reducing average taxes by having less progressive tax systems than other countries.

The Marginal Cost of Public Funds in OECD Countries; Hours of Work Versus Labor Force Participation

A central finding of the modern labor market literature is that labor supply responses tend to be concentrated along the extensive margin (labor force participation) rather than the intensive margin (hours of work). Yet, the literature on the marginal cost of public funds (MCF) focuses solely on the intensive margin. In this paper we demonstrate that it is important to incorporate extensive labor supply responses into the analysis. Firstly, MCF becomes a function of average taxes, rather than just marginal taxes. Secondly, participation decisions and thus MCF depend on the magnitude of transfers for those out of work. Our calculations for 23 OECD countries reveal that the MCF becomes substantially higher once the participation effect is accounted for. This is especially the case for continental European countries where average taxes are high and benefit systems are generous.

Labor Taxes, Wage Setting and the Relative Wage Effect

Public finance solutions to high unemployment in Europe have often been advocated during the past years. With unemployment concentrated among the young and unskilled, it has been suggested that the reduction of social security contributions for low wage earnings, financed by a carbon tax, could yield a double dividend, the reduction of unemployment and the abatement of pollution. A decline in average labor taxes reduces unemployment if it generates lower pretax wages. Pretax wages fall if real after tax income from unemployment and leisure is not affected or only partially affected by the change in average taxes. When unemployment benefits are not taxed in a unionized economy, lower average labor taxes reduce the replacement ratio, and unions are willing to accept lower pretax wages because the net income loss from employment increases. Changes in labor taxation do not necessarily require that average labor taxes vary. In principle, a switch from payroll to income taxes, given average rates, could affect wage pressure and unemployment. The empirical evidence to date, however, does not support this possibility. When labor taxation is nonlinear, another opportunity is to vary the degree of labor tax progressivity. Economic theory suggests that higher progressivity could reduce unemployment. Suppose that wages are bargained over by unions. When a union contemplates the possibility of a wage hike, it has to consider that say for a 1% increase in the after tax wage the pretax wage increases by 1/v, where v denotes the coefficient of residual income progression. This implies that the expected employment loss associated to the higher after tax wage is e/v, where e is the elasticity of labor demand. Since v This empirical paper adds to the existing literature additional evidence based on Italian data. We use both panel and grouped data to study the effects of average and marginal (payroll and income) tax rates on wage pressure, and investigate whether these effects vary by skill, age group and region of residence. Our empirical findings are summarized as follows: a) changes in average payroll taxes are not fully absorbed by offsetting changes in the after tax wage and affect both pretax wages and employment; b) the estimated effects of changes in average income taxes on pretax wages are mixed but on balance the evidence suggests that after tax wages do not fully offset these changes; c) higher tax progressivity increases pretax wages; d) there are significant differences in the relationship between labor taxes and pretax wages by age group but not by region of residence or skill. We also find that the estimated elasticity of pretax wages to changes in marginal tax rates, given average rates, is large and ranges between 0.919 and 1.131, depending on the specification being used. It is difficult to explain this large positive elasticity exclusively with the argument that the labor supply effect prevails over the wage moderation effect. Therefore, we add an additional mechanism, the relative wage effect, and describe how it can contribute to producing the above results. Briefly put, when individuals and unions care about relative wages and an increase in tax progressivity reduces the own wage via the wage moderation effect, this reduction translates into lower relative wages, which can only be avoided by increasing wage pressure.

Effects of Progressive Taxes under Decentralized Bargaining and Heterogeneous Labor

We consider changes in income tax progressivity in an economy where workers' productivities differ and workers and firms bargain individually over wages. With given employment a pure increase in tax progressivity reduces wages by reducing workers' relative bargaining power. When average taxes also increase, after-tax wages are unambiguously reduced, while the effects on gross wages and firm profitability are ambiguous. We next endogenize employment and firm entry under a uniform worker productivity distribution and the government's only policy instrument is a linear income tax. While a first-best solution then is ruled out, a second-best solution can be implemented using a family of linear tax functions, where a more progressive tax implies a higher tax revenue to the government. We show that the government can increase its tax revenue, and reduce after-tax income differences, without any additional disturbance to allocation.

Ambiguous effects of tax progressivity — theory and Danish evidence

Recent tax reforms in the OECD area have aimed at reducing the progressivity of labour income taxation by reducing marginal taxes for given average taxes. Theory has shown that this reduces employment/production when workers and firms determine wages through bargaining. This paper shows that an opposite effect arises when both wages and working hours are subject to bargaining. This may reverse the traditional result and this is especially likely if the bargaining power of workers is low and if labour supply is relatively elastic. In conclusion, the overall effect of a reduction in progressivity is ambiguous. The empirical estimates for Denmark indicate that the overall effect is negative for blue-collar workers and neutral for white-collar workers.

Effort, taxation and unemployment

The importance of the design of the income tax system for the incentive to supply effort is considered in a situation where firms set wages. A tax reform raising marginal taxes at all income levels and increasing (decreasing) average taxes at high (low) income levels may lead to higher wages, lower employment and higher unemployment.

Effort, Taxation and Unemployment

The importance of the design of the income tax system for the incentive to supply effort is considered for both a situation where firms (efficiency wage model) or unions (monopoly union model) have the power to determine wages. A tax reform raising marginal taxes at all income levels and increasing (decreasing) average taxes at high (low) income levels may lead to higher wages, lower employment and higher unemployment under either wage determination regime.

The Growth in Full-Time Work Among Swedish Women in the 1980s

Using panel data from the Swedish Labor Force Surveys, this article analyzes the shift from part-time to full-time work among Swedish women in the 1980s This change occurred among all groups of women Two main sources of the shift were found First, since 1983 more women have increased them hours from part time to full time than have reduced them Second, non-employed women have become more inclined to enter full- time rather than part-time work Expanded public childcare facilities are likely to have stimulatcd the rise in hours worked, especially among mothers of young school children The prolonging ot the parental teave period is found to have controbuted slightly to the growth in full-time work. while change, in the age-structure had no impact To account for the shift among all women, I point to the tax reform carried out in 1983 and the subsequent years in combination with a high level of labor demand Marginal tax rates for full-time workers were reduced and those tor part-time workers raised. while average taxes were raised slightlv

1986 Tax Reform and Dairy Farm Businesses

The 1985 tax data for 120 dairy farm businesses was used to determine the effects of the Tax Reform Act of 1986 on taxes paid by dairy farmers. Taxes before credits peak in 1991 without capitalization and in 1987 with capitalization of pre-productive expenses. Carryover of investment tax credit limits tax increases for a few years, particularly for middle income dairymen. Modification of the ratio of regular depreciable to capitalizable property caused by changes in culling rates can alter the optimal capitalization election decision. In the long run, average taxes will increase about 170 percent.

1986 Tax Reform and Dairy Farm Businesses

AbstractThe 1985 tax data for 120 dairy farm businesses was used to determine the effects of the Tax Reform Act of 1986 on taxes paid by dairy farmers. Taxes before credits peak in 1991 without capitalization and in 1987 with capitalization of pre‐productive expenses. Carryover of investment tax credit limits tax increases for a few years, particularly for middle income dairymen. Modification of the ratio of regular depreciable to capitalizable property caused by changes in culling rates can alter the optimal capitalization election decision. In the long run, average taxes will increase about 170 percent.

Benefits and Burdens of Migration (With Specific References to the Brain Drain)

Arguments alleging benefits or burdens arising from migration on regions or countries losing population as well as on those gaining population are inexhaustible. There are, for example, arguments in fast growing regions and countries that immigration imposes a burden because the marginal cost of providing public services exceeds average cost and taxes are equal to average. The argument is reversed if it is assumed that public services are produced under conditions of decreasing cost. Areas losing population argue that emigration creates excess capacity in social overhead capital and erodes the tax base. Areas gaining population argue that new migrants tend to be young persons with (born or not yet born) children who impose additional costs, primarily education, but also parks, police, etc., on the resident population. This is sort of a reverse brain drain argument with a generational shift. Also, it is argued that new migrants are free riding consumers of the residents' past investment in social overhead capital. The counter argument takes the line that this is not true if the social overhead capital is debt financed or if it is reflected in the price of land owned by the resident population and sold to new migrants. It is further argued that inmigration can create congestion, pollution or other external costs on the resident population. As if all this were not enough, migrants also compete with existing workers for jobs and depress wages. On the other hand, in some cases new migrants tend to take jobs in more junior positions in lower paid or less preferred occupations, thus