WAGE SETTING AND THE TAX-SYSTEM - THEORY AND EVIDENCE FOR THE UNITED-KINGDOM

This paper analyses the effects of a non-linear tax system on wage bar gaining. The main conclusions are: an increase in the marginal income or payroll tax rate reduces the pre-tax wage; in the isoelastic case, an increase in the average tax rate increases the pre-tax wage by more than the tax increase, and a measure of the progressivity of the tax system (residual income progression) is a sufficient measure of the ef fect of the tax system on wage pressure. Empirical evidence is present ed to support these propositions, and the predictions of the model reg arding the effect of recent changes to the U.K. tax system on the dist ribution of earnings discussed.