LABOR TAXATION: INSIGHTS FROM THE WORLD ECONOMIC FORUM SURVEY.

• Author: Mitsopoulos, Michael

One of the main topics highlighted in the field of economic policy applications is the impact of taxation on labor. In an era in which macroeconomic stability, technological change, and globalization pressure the job market, there exists no strong consensus in the literature on how exactly taxation influences growth, choice between work and leisure, share of income attributed to labor, or participation in different job market segments. This article focuses on employment levels and uses the results of the World Economic Forum (WEF) Executive Opinion Survey (EOS) between 2013 and 2017 to bypass several challenges often faced in the literature. By doing so, we complement the insights of the existing literature by establishing that, in institutionally mature countries, taxation that is deemed by a survey of business executives to pose a disincentive to work reduces employment.

Impact of Taxes on Employment and the Labor Income Share

The impact of taxes on employment and labor's share of income has received attention in seminal work like Ramsey (1927), Mirrlees (1971), Hall (1973), Rosen (1979), Hausman (1980, 1981), Stem (19S6), Hausman and Poterba (1987), Triest (1990), Feldstein (1995), and Diamond (1998). Over the years, the literature matured tiying to overcome limitations posed by data availability and methodological challenges. Meghir and Phillips (2010), as well as Mankiw, Weinzierl, and Yagan (2009), summarized die key insights of the existing literature reflecting die simple reality that both income and substitution effects are at work. (1) Manski (2012a, 2012b) is not alone in arguing that there is no certain answer to die question of what impact a tax increase has on labor.

In spite of the controversies found in the literature, there exists sufficient empirical evidence to suggest that increasing taxes on labor leads to a slowdown in economic growdi and a decline in employment, as well as an encouragement of undeclared work (Davis and Henrekson 2004; Frederiksen, Graversen, and Smith 2005). This appears to be true at least for high-tax European and OECD countries (Planas, Roeger, and Rossi 2003; Bassanini and Duval 2006) and for more vulnerable population groups (Blundell 2012; Neumark and Shirley 2020).

The aforementioned studies often use household survey data, which are available for net earnings, and thus are able to focus directly on the impact of changes in net income on labor supply and equilibrium outcomes. These approaches mostly focus on withingroup variation or on specific parts of the distribution of employees and incomes, and especially on kinks or policy-induced changes in parts of the tax wedge schedule. Thus, they can avoid identification problems, but other problems, such as the endogeneity of the earners' distribution across income brackets, may persist. (2)

In recent decades, some researchers have argued that the stability of labor's share of income has been declining due to technological change and, to a lesser extent, certain aspects of globalization (IMF 2017: chap. 3; Dao, Das, and Koczan 2019). Those trends are found to harm lower- and middle-skilled workers and jobs that are easy to routinize, but no definite consensus has been formed.

Finally, some differentiation appears in this literature according to country groups, time, and the specifications of each analysis that includes a wide array of independent variables ranging from market regulation to education.

A number of the researchers who have investigated tire labor income share have also tried to add the impact of taxation. Estrada and Valdeolivas (2012) examined the impact of taxes on labor income and did not find a statistically significant relationship. They argued that a nonwage component is included in the total compensation of employees, implying that an identification problem exists even before one can be concerned about endogeneity (Li and Lin 2016). Stockhammer (2013) included the tax wedge but failed to find a significant impact on the labor income share. In other research, the European Commission (2007: chap. 5) analyzed the impact of the tax wedge on specific subgroups and found an impact on lower- and upper-tier income employment groups.

A methodological issue that emerges when the labor income share is used is the need to account for the income attributed to self-employed labor but lumped with capital income by national accounts. This problem is commonly corrected by an assumption that the self-employed earn the same income as wage earners (Arpaia, Perez, and Pichehnann 2009; European Commission 2007). In addition, according to researchers like Clio, Hwang, and Schreyer (2017), as capital becomes more important so does depreciation. Hence, labor income will inevitably decline relative to gross income, if this fact is not properly accounted for. We are not aware of research with such an adjustment that examines the impact of taxation.

In view of the above, we perceive an opportunity to use a survey from the World Economic Forum to study the relationship between taxation and employment levels at a macroeconomic level.

Insights from the World Economic Fomm Survey

For the last several decades, the World Economic Fomm has conducted an annual EOS among businesses in most countries, both developed and developing. For this survey, a questionnaire is distributed by local partners to a sample of local businesses that have to meet certain criteria to ensure representativeness by size and sectors. Furthermore, a minimum number of completed or largely completed surveys have to be received in order to ensure the inclusion of a country in the annual publication, with the WEF providing extensive details about the scope and technical execution of the survey (see, e.g., World Economic Forum 2014).

The questionnaires tend to be completed by high-ranking executives of companies that have a structure to deal with such questionnaires and, as a result, tend to be larger and part of the official economy. Therefore, it has to be noted that the answers provided may represent a different share of economic activity in each country...