Intertemporal Labor Supply Substitution? Evidence from the Swiss Income Tax Holidays

Abstract

This paper estimates intertemporal labor supply responses to two-year long income tax holidays staggered across Swiss cantons. Cantons shifted from an income tax system based on the previous two years' income to a standard annual pay as you earn system, leaving two years of income untaxed. We find significant but quantitatively very small responses of wage earnings with an inter-temporal elasticity of .025 overall. High wage income earners and especially the self-employed display larger responses with elasticities around .1 and .25 respectively, most likely driven by tax avoidance. We find no effects along the extensive margin at all.