A Cross-Country Analysis of the Tax-Push HypothesisThis paper presents a microeconomic theoretical model of union optimizing behavior which is then used to test the relevance of the tax-push hypothesis for wage formation in nine Western European countries. Two factors—the compensation and the progressivity effects—are shown by the model to account for the effect (if any) of tax rates on wage formation. A wage equation tested for the period 1960-1988 shows that in general small open economies have negligible compensation and progressivity effects, while in larger economies direct, indirect and social security tax rates are transferred onto the real labor cost. All countries show a weakening of the tax shifting starting at the end of the 1970s or the beginning of the 1980s. |
Contents
Introduction | 1 |
A Microeconomic Model of Tax Shifting on Optimum Wage Setting | 21 |
A Testable Model of the Wage Setting for Nine European Countries | 30 |
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A(wr Accounts various issues Austria average direct tax Belgium ceteris paribus changes Chart coefficient column compensation effect constant consumer price cross-country degree of progressivity Denmark direct tax rate direct tax system dp/dw econometric results employees employment relative endogenous exogenous facto fiscal indexation fiscal parameter flat France full employment fully indexed GDP deflator Germany income brackets Italy logarithm macroeconomic marginal direct tax marginal tax rate National Accounts various negative net real wage Netherlands Nine European Countries nominal wage rate OECD National Accounts Padoa Schioppa personal income tax positive product price progressivity effect progressivity index real labor cost real reservation wage real wage rate regressors security tax rate semi-elasticity social security contributions social security tax structural break Sweden Table 2b tax progressivity Tax Rate Equation tax reform tax wedge tax-push hypothesis taxation is progressive union to employment United Kingdom wage setting weight assigned zero