It takes two to tango: Labour responses to an income tax holiday in Argentina

CRUCES, GUILLERMO; DARIO TORTAROLO; VICTORIA CASTILLO

NICEP - Working Paper

School of Economics and School of Politics and International Relations, University Park, Nottingham

Año: 2020

2397-9771

We exploit a large, quasi-randomized, 2.5-year-long income tax holiday to identifyintertemporal labor responses of high-wage earners to net wage changes. In August 2013, the Argentine government exempted a group of wage earners from theincome tax for 2.5 years while leaving in place the tax on other high-wage earners.Eligibility was based on whether past wage earnings were below a fixed threshold,thus levying sharply different marginal and average tax rates?effectively 0% forworkers below the threshold. Using rich population-wide administrative data anda regression discontinuity design, we estimate a precise and very small wage earnings elasticity of 0.017 for this large, salient, and temporary income tax change.Responses are larger for more flexible outcomes (overtime hours) and for moreelastic groups (job switchers and managers). We also find avoidance responsesfrom new entrants who faced no tax if their first monthly wage was below thefixed threshold. This strategic entry below the threshold to dodge taxes requiredcoordination with employers. Our findings indicate rigidities in the labor marketthat require employer-employee cooperation to be overcome for wage earners tobe able to respond to tax changes.