Progressive taxation and wage setting: Some evidence for Denmark

The proposition that a progressive tax system contributes to wage moderatio n is studied using Danish earnings data disaggregated by occupation, gender and earnings level. Our main conclusions are that income-tax progression a ffects wage setting, but whether it moderates or exaggerates wage pressure is income dependent, An increase in progressivity reduces the pre-tax earni ngs of middle-income workers (manual mate workers and moderate income carri ers among both male and female non-manual workers). The reverse is found fo r high-income earners (non-manual male workers), in that an increase in pro gressivity tends to raise pre-tax earnings. Finally, there is no significan t effect of tax progressivity on the wages of low-income earners.