Labor Earnings Respond Differently toIncome-Tax and to Payroll-Tax Reforms

We estimate the responses of gross labor earnings with respect to marginal and average netof-tax rates in France over the period 2003-2006. We exploit a series of reforms to theincome-tax and the payroll-tax schedules that affect individuals who earn less than twice theminimum wage. Our estimate for the elasticity of gross labor earnings with respect to themarginal net-of-income-tax rate is around 0.2, while we find no response to the marginal netof-payroll-tax rate. The elasticity with respect to the average net-of-tax rates is not significantfor the income-tax schedule, while it is close to -1 for the payroll-tax schedule. A plausibleexplanation is the existence of significant labor supply responses to the income-tax schedule,combined with a short-term rigidity of the hourly taxable wage (i.e. the gross wage minuspayroll taxes), casting doubts about public finance analysis that assumes perfect competitionon the labor market. Finally, the effect of the net-of-income-tax rate seems to be driven bylabor supply participation decisions, in particular those of females....