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INCOME TAXES AND THE COMPOSITION OF PAY: EVIDENCE FROM THE BRITISH HOUSEHOLD PANEL SURVEY
Author(s) -
Brunello Giorgio,
Comi Simona,
Sonedda Daniela
Publication year - 2011
Publication title -
scottish journal of political economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.4
H-Index - 46
eISSN - 1467-9485
pISSN - 0036-9292
DOI - 10.1111/j.1467-9485.2011.00548.x
Subject(s) - economics , incentive , panel data , tax rate , labour economics , econometrics , microeconomics , monetary economics
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%.