Abstract: Most research of the impact of tax exemption on wage inequality in China doesn’t include the feedback of individuals, which is likely to lead to bias and distortion of policy assessment. So firstly, by using Heckman Three Steps and DID(difference in differences) methods, we verify that the raise of tax exemption increases the labor supply time of individuals and the increasing range of woman’s labor supply time is larger than that of man. Then, we build the Shapely decomposition with behavioral responses to analyze the direct distribution effect and the indirect behavioral effect of the impact of tax exemption change on wage inequality. The results show that behavioral effect is significant, which explains 13-50 percent of the inequality change and exacerbate the wage inequality. The real impact of exemption on inequality will be underestimated without considering the behavioral effect. Further more, tax exemption amount should be set to match income distribution, and the direct effect may exacerbate the wage inequality distribution with higher tax exemption amount.
Keywords: Tax Exemption, Labor Supply, Wage Inequality, Heckman Three Steps, Shapely Decomposition
source:Finance & Trade Economics ,No3,2014