Labor Supply Responses to Income Tax Free and Bracket Expansions

This paper contributes to the labor supply literature by focusing on how middle earners respond to financial incentives and whether the responses are different between men and women. We exploit substantial expansions in the level of individual income exempt from taxation and taxed at a lower marginal tax rate while the schedule of marginal tax rates remained the same. These tax revisions improved the financial incentives to work, in particular for individuals in the middle of the income distribution. We find robust evidence that the tax reforms increased significantly the wages of medium and high educated married males and females. They also had a positive impact on work participation that was more substantial for married women, especially the medium educated. We estimate significant positive own wage labor supply elasticities that are about the same for men and women when we condition on the labor outcome effects of inflows of EU and non-EU foreign workers, which changed the skill distribution of the economy and had a more significant impact on female labor outcomes.