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Journal Article

Income taxes and the composition of pay: evidence from the British Household Panel Survey

Authors

Publication date

Jul 2011

Summary

According to the standard principal-agent model, the optimal composition of pay should balance the provision of incentives with the individual demand for insurance. Do income taxes alter this balance? We show that the relative share of Performance-related pay (PRP), on total pay is reduced by higher average and marginal income taxes. Empirical evidence based on the British Household Panel Survey is consistent with the theoretical predictions of the tax–augmented principal-agent model. Our estimates suggest that a 10% reduction in the marginal income tax rate, holding the average tax rate constant, increases the share of PRP in total pay by 2.25–3.02%, depending on the empirical specification. Similarly, a 10% reduction in the average income tax rate, holding the marginal tax rate constant, increases the share of PRP in total pay by 5.10–5.27%.

Published in

Scottish Journal of Political Economy

Volume and page numbers

58 , 297 -322

ISSN

16

Subjects

Wages And Earnings and Taxation

Links

http://serlib0.essex.ac.uk/record=b1587548~S5

Notes

Albert Sloman Library Periodicals *restricted to Univ. Essex registered users*


Related publications

  1. Income taxes and the composition of pay

    Giorgio Brunello, Simona Comi, and Daniela Sonedda

    1. Wages And Earnings
    2. Taxation
  2. Income taxes and the composition of pay

    Giorgio Brunello, Simona Comi, and Daniela Sonedda

    1. Wages And Earnings
    2. Taxation

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