Measuring the efficiency cost of wage taxation with uncertain labor productivity

Abstract Estimates of the marginal efficiency cost of wage taxation can vary between 7% and 21% of revenues raised. Using a consistent definition eliminates much of the variability in these estimates. However, all studies carried out evaluate the marginal efficiency cost within a certainty framework. The inclusion of uncertain labor productivity dramatically changes the efficiency loss measurement by affecting the marginal utility of lump-sum income and consequently altering the marginal efficiency cost of a tax change.