Asymmetric labor supply responses to tax rate reform: Experimental evidence

We study how individuals adjust their labor supply in response to tax reforms that alter income tax progressivity. In an online experiment with 522 participants, we compare responses to reforms that replace a progressive tax system with a flat tax and vice versa. We find asymmetric effects: labor supply increases when a progressive regime is replaced by a flat tax system, but does not decline when progressivity is introduced. This increase in labor provision occurs only when the reform lowers the marginal tax rate, not when it raises it. Our results suggest that labor supply responses to tax reforms are nuanced and path-dependent: reforms change behavior when they ease tax burdens for individuals who were previously discouraged from working more due to progressive thresholds. • We study labor supply responses to tax rate reform and find asymmetric effects. • Labor supply increases when a progressive regime is replaced by a flat system. • But this increase occurs only when the reform reduces the tax burden. • In contrast, labor supply does not decline when progressivity is introduced. • Our findings suggest labor supply responses to tax reform are nuanced and path-dependent.