Saturday, March 14, 2009

Will wages adjust to offset the new tax progressivity?

In equilibrium, we know that workers must be compensated for jobs that require higher levels of investment in human capital, like physicians. If not, people would exit these professions into those that require fewer investments. Likewise, if we increase the progressivity of the tax system, we should expect a compensating wage increase. Evidence that this happened in Canada in 1967
...our results suggest that the progressivity of the Canadian income tax system significantly affected wage settlements and that the implicit tax increases attributable to this progressivity were at least partially forward shifted into higher wage rates.

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