Nothing Special   »   [go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/red/sed009/1170.html
   My bibliography  Save this paper

Taxation of Human Capital and Cross-Country Trends in Wage Inequality

Author

Listed:
  • Serdar Ozkan

    (University of Pennsylvania)

  • Burhanettin Kuruscu

    (University of Texas at Austin)

  • Fatih Guvenen

    (University of Minnesota and NBER)

Abstract
Since the 1980's, wage inequality has increased substantially in the U.S. and U.K while changing little in most of continential European countries (CEU). This paper studies the effects of differences in labor income tax policies between US-UK and CEU for these trends. We begin by documenting three new empirical facts. First, we show that countries with a more progressive labor income tax schedule have significantly lower before-tax wage inequality at a point in time. Second, progressivity is also negatively correlated with the rise of wage inequality over time. Third, and finally, countries that experienced the smallest rise (or largest fall) in labor hours also had the smallest rise in wage inequality. We next construct a life-cycle model in which individuals decide each period whether to go to school, to work, or to be unemployed. Individuals can accumulate skills either in school or while working. Wage inequality arises from differences across individuals in their ability to learn new skills as well as from idiosyncratic shocks to human capital. In this framework, progressive taxation compresses the wage structure, thereby distorting the incentives to accumulate human capital, in turn reducing the cross-sectional dispersion of wages. When this economy experiences skill-biased technical change, progressivity dampens the rise in wage dispersion over time. Furthermore, these effects of progressivity are compounded by differences in average labor income tax rates: the higher taxes in the CEU reduces labor supply (and the benefit of human capital investments), further muting the response to SBTC. Consequently, as in the data, countries with higher average taxes and/or progressivity experience a larger fall in hours and a smaller rise in inequality. We estimate that differences in tax policies can account for 2/3 of the difference in the level and rise in wage inequality between US-UK and the CEU since 1980.

Suggested Citation

  • Serdar Ozkan & Burhanettin Kuruscu & Fatih Guvenen, 2009. "Taxation of Human Capital and Cross-Country Trends in Wage Inequality," 2009 Meeting Papers 1170, Society for Economic Dynamics.
    • Handle: RePEc:red:sed009:1170
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Fatih Guvenen & Burhanettin Kuruscu, 2010. "A Quantitative Analysis of the Evolution of the US Wage Distribution, 1970–2000," NBER Chapters, in: NBER Macroeconomics Annual 2009, Volume 24, pages 227-276, National Bureau of Economic Research, Inc.
    2. Blandin, Adam & Peterman, William B., 2019. "Taxing capital? The importance of how human capital is accumulated," European Economic Review, Elsevier, vol. 119(C), pages 482-508.
    3. Marina Mendes, 2013. "A Cross-Country Comparison of the Impact of Labor Income Tax on Female Labor Supply," Working Papers 1302, Centro de Investigacion Economica, ITAM.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed009:1170. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christian Zimmermann (email available below). General contact details of provider: https://edirc.repec.org/data/sedddea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.