Taxing high wages: Evidence from the Netherlands

• In Event: Wage Taxation and Employment

Abstract

This paper uses rich administrative data to study the 16%-point surtax levied on annual wages exceeding €150,000 in the Netherlands in 2012 and 2013. First, we document pronounced bunching at the threshold, driven almost entirely by owner–managers that persists even after repeal of the tax. Bunching occurs across all sectors, but is particularly strong in legal services, accounting, and tax consultancy. Second, we compare treated workers to a control group of similarly high-earning self-employed individuals in a difference-in-differences design and find that gross wages fell only for owner-managers, with no effect for employees. Third, we examine intertemporal income shifting around the announcement and repeal of the tax and find no clear evidence of significant shifting behaviour. Our findings shed light on who ultimately bears the burden of high-wage taxation, workers or shareholders, the implications for tax progressivity, how wages are set at the top of the wage distribution, and how firms and individuals adapt to tax reforms.

Author

• Wouter Leenders, UC Berkeley