Browsing by Subject "wage"

While labor studies of the effects of income taxation have often focused on labor force participation and work hour decisions, Feldstein (1995) argued that taxpayers ultimately want to adjust their taxable income in response to changes in marginal tax rates. He also pointed out that adjusting taxable income is not limited to changing hours of work. For instance, facing higher tax rates, individuals may reduce their taxable income by giving up high-paid occupations that require high levels of effort in exchange for jobs that pay lower wages but are less onerous. In this dissertation, I examine how individuals change their occupations to adjust their wages, levels of work effort, and number of work hours in response to changes in marginal tax rates. In particular, I estimate effects of the switch from separate to joint taxation at the federal level in 1948 on married couples’ occupations. This policy increased marginal tax rates for wives but decreased them for husbands. My results show that joint taxation had no effect on husbands, reduced labor force participation rates among wives, and induced wives who remained in the labor force to choose occupations that paid lower wages, required lower effort, but involved the same level of full-time work. These results reveal that under some circumstances, individuals may respond to higher tax rates by reducing work effort instead of reducing work hours. The largest effects of joint taxation were on middle-age wives, who faced the largest husband-wife earning gap among all wives.