How Does a Reduction in the Marginal Tax Rate Affect Labor Supply in the Short-Term for Top-Income Earners?

Abstract: This paper studies the labor market in Sweden after a cut in the top-income marginal tax rate, by conducting a difference-in-difference analysis on data over wages in Sweden two years after the policy change. We find large, positive and significant results on an aggregate level, but insignificant ambiguous results on an income per person level. This study is one of the first to look at this specific policy change and aims to contribute within the field of optimal taxation. It is important since the efficiency-equality tradeoff is a big question in most economies. This study does not only look at the short-term effects, but also studies a policy change in taxation of labor during a time when the labor market was experiencing many other changes caused by the Covid-19 pandemic. While we look at the short-term effects it is important to note that the full effect is estimated to kick in successively during a longer period, and how big the effect will be depends on the elasticity of taxable income.