Taxes, wages and working hours.

This paper presents estimates of individuals' responses in hourly wages to changes in marginal tax rates. Estimates based on register panel data of Swedish households covering the period 1992 to 2011 produce significant but relatively small net-of-tax rate elasticities. The results vary with family type, with the largest elasticities obtained for single males and the smallest for married/cohabitant females. Despite these seemingly small elasticities, evaluation of the effects of a reduced state tax using a microsimulation model shows that the effort effect matters. The largest effect is due to changes in number of working hours yet including the effort effect results in an almost self-financed reform. As a reference to the earlier literature, we also estimate taxable income elasticities. As expected, these are larger than for the hourly wage rates. However, both specifications produce significantly and positive income effects. One contribution is related to the definition of the instruments used to solve the well-known problem of endogeneity.