The output effects of labor income taxes in OECD countries

This article considers the relationship between labor income taxes and output. An illustrative model indicates that the sign of the output effect of labor taxation policies is ambiguous and depends not only on the technology parameters but also on the taxation level. The empirical evidence for fifteen Organisation for Economic Co-operation and Development (OECD) countries over the period 1974-97 shows that the effect is heterogeneous across countries both in the short run and in the long run when considering the average tax rate. We also find a common positive and significant long-run relationship for the marginal tax rate.