Labor Income Responds Differently to Income-Tax and Payroll-Tax Reforms

Etienne Lehmann (1, 2, 3) , François Marical (4) , Laurence Rioux (5)

1 TEPP - Travail, Emploi et Politiques Publiques
2 CREST - Centre de Recherche en Économie et Statistique
3 ERMES - Equipe de recherche sur les marches, l'emploi et la simulation
4 Institut national de la statistique et des études économiques (INSEE)
5 CREST-INSEE - Centre de Recherche en Economie et en Statistique

We estimate the responses of gross labor income with respect to marginal and average net-oftax rates in France over the period 2003-2006. We exploit a series of reforms to the income-tax and payroll-tax schedules affecting individuals who earn less than twice the minimum wage. Our estimate for the elasticity of gross labor income with respect to the marginal net-of-income-tax rate is around 0.2, while we find no response to the marginal net-of-payroll-tax rate. The elasticity with respect to the average net-of-tax rate is not significant for the income-tax schedule, while it is close to -1 for the payroll-tax schedule. A plausible explanation is the existence of significant labor supply responses to the income-tax schedule, combined with sticky posted wages (i.e., the gross labor income minus payroll taxes divided by hours worked). Finally, the effect of the net-of-income-tax rate seems to be driven by participation decisions, in particular those of married women.

Mots clés: Labor Income; Payroll Tax; Income Tax

Domaines: Economies et finances

Etienne Lehmann, François Marical, Laurence Rioux. Labor Income Responds Differently to Income-Tax and Payroll-Tax Reforms. 2012. ⟨halshs-00856246⟩