Question

) Suppose you want to test the hypothesis that higher income taxes make people work fewer hours per year on average. The tax rate is your independent variable and hours worked per year is your dependent variable and you want to use each individual country as an observation. Suppose you run your regression and find that people in countries with higher income taxes work more hours per year. What is a potential reason why that could happen? what is the problem in testing the original hypothesis in this way?

Answer 1

1 According to McDaniel 2007 and rogerson 2008 in the early Seventies the common tax rate on labor income in Belgium France Germany Italy and the Netherlands was about 39 which were higher than the 18 average fees in the US.

2 ions the early 2000s the average tax rate on labor in these European countries was about fifty one which was nevertheless an awful lot higher than the 22 average fee in the US.

3 There is a latest literature that compares labor market adjustments on the intensive vs. the widespread margin in unique institutional settings for the duration of the extraordinary recession egg US vs. Germany put forth via mark and wesselbaum 2011 and burda and hunt 2011.

4 Apria and Moure 2012 reviewed related literature that analyzes the effect of institutional variations on labor market effects in OECD countries.

• Potential purposes - potential purpose as the people hourbargaining share is large hours per worker are diminished by extra and employment is lowered by using much less in the mechanism when hours per employee are decided completely by means of the family this goes to the case when the worker has a one hundred percentage hour bargaining energy in this scenario when the leisure utility is linear in hours the effect on employment is zero and all bad outcomes are on hours per worker.

• Problems –

1. Taxes which are quickly imposed to meet any emergency eg argil tax imposed for 12 months or so or taxes imposed on windfall obtain eg lottery earnings do not produce destructive effects on the desire to work shop and invest.

2. Through diverting resources to the desired directions taxation can influence the extent or the measurement of production as properly as the pattern of manufacturing in the economic system.

3. The consequences of taxation on the willingness to work retailer and make investments are partly the end result of cash burden of tax and partly the end result of psychological burden of tax.