Income taxes and the composition of pay:evidence from the British household panel survey

Brunello, Giorgio and Comi, Simona and Sonedda, Daniela (2011) Income taxes and the composition of pay:evidence from the British household panel survey. Scottish Journal of Political Economy, 58 (3). pp. 297-322. ISSN 0036-9292

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Abstract

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%.

Item Type:
Journal Article
Journal or Publication Title:
Scottish Journal of Political Economy
Uncontrolled Keywords:
/dk/atira/pure/subjectarea/asjc/3300/3312
Subjects:
ID Code:
67291
Deposited By:
Deposited On:
28 Oct 2013 09:20
Refereed?:
Yes
Published?:
Published
Last Modified:
01 Jan 2020 08:41