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Wage setting and the tax system: theory and evidence for the UK

By Ben Lockwood and Alan Manning

Abstract

This paper analyses the effect of a non-linear tax system on wage bargaining. The main conclusions are: an increase in the marginal income or payroll tax reduces the pre-tax wage; in the iso-elastic case, an increase in the average tax rate increases the pre-tax wage by more than the tax increase, and a measure of the progressivity of the tax system (residual income progression) is a sufficient measure of the effect of the tax system on wage pressure. Empirical evidence is presented to support these propositions, and the predictions of the model regarding the effect of recent changes to the U.K tax system on the distribution of earnings discussed

Topics: HD Industries. Land use. Labor
Publisher: Centre for Economic Performance, London School of Economics and Political Science
Year: 1993
OAI identifier: oai:eprints.lse.ac.uk:21004
Provided by: LSE Research Online
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