Adjust Me if I Can’t: The Effect of Firm Incentives on Labor Supply Responses to Taxes

Tazhitdinova, Alisa (2015): Adjust Me if I Can’t: The Effect of Firm Incentives on Labor Supply Responses to Taxes.

Abstract

I provide theoretical and empirical evidence on the importance of statu- tory incidence in labor markets in the presence of asymmetric frictions. Using a theoretical model I show that labor supply responses are stronger when the statutory incidence of taxes or labor rules falls on firms, even when wages can adjust freely. I explore these mechanisms by studying labor responses to incentives generated by the “Mini-Job” program aimed at increasing labor supply of low-income individuals in Germany. Using administrative data, I show evidence of a strong behavioral response – in the form of sharp bunching – to the mini-job threshold that generates large discontinuous changes both in the marginal tax rates and in the total in- come and payroll tax liability of individuals in Germany. Sharp bunching translates into elasticity estimates that are an order of magnitude larger than has been previously estimated using the bunching approach. To ex- plain the magnitude of the observed response, I show that in addition to tax rates, fringe benefit payments also change at the threshold. Mini-job workers receive smaller yearly bonuses and fewer vacation days but are paid higher gross wages than regular workers. These results indicate that lower fringe benefits make mini-jobs attractive to employers, thus facilitating labor supply responses in accordance with the model’s predictions.

• Item Type: MPRA Paper
• Language: English
• Keywords: Payroll Tax, Income Tax, Earnings Elasticity, Incidence, Fringe Benefits
• Subjects: H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H20 - General; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H22 - Incidence; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H24 - Personal Income and Other Nonbusiness Taxes and Subsidies; H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H31 - Household; H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H32 - Firm; J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J22 - Time Allocation and Labor Supply; J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J23 - Labor Demand; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J32 - Nonwage Labor Costs and Benefits ; Retirement Plans ; Private Pensions; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J38 - Public Policy

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