Orkhan Nadirov

School of Public and International Affairs, ADA University,

Baku, Azerbaijan

E-mail: onadirov@ada.edu.az 

ORCID 0000-0003-0978-1387

Taxes and the incentive to work under flat and progressive tax systems in Slovakia

Bruce Dehning

Argyros School of Business and Economics, Chapman University,

Orange, CA United States;

Faculty of Management and Economics, Tomas Bata University, Zlin, Czech Republic

E-mail: bdehning@chapman.edu; dehning@utb.cz

ORCID 0000-0002-2216-6867

Drahomira Pavelkova

Faculty of Management and Economics, Tomas Bata University in Zlín,

Zlín, Czech Republic

E-mail: pavelkova@utb.cz 

ORCID 0000-0003-1399-6129

Abstract. This study examines the impact of taxes on the incentive to work under flat and progressive tax systems. Of particular interest are the changes from progressive-to-flat and flat-to-progressive tax conditions. To measure the impact of taxes on the incentive to work under both scenarios, we relate hours worked with the effective marginal tax rates. Using national accounts data and the Prescott’s (2004) labor market model, Slovakian work hours were examined at points in time around the adoption of a flat tax system in 2004 and a progressive tax system in 2013. In Slovakia, there was a transition from a progressive to a flat tax system in 2004, followed by a reversion back to a progressive tax system in 2013. Theoretically, the incentive to work increases when a progressive tax structure is replaced with a flat tax, while the incentive to work decreases in the opposite case. However, the findings show that when Slovakia replaced its progressive tax with a flat one, the actual hours worked decreased, contrary to predictions. When the flat tax was abandoned in favor of a progressive tax structure, hours worked also decreased, but less than when the flat tax was introduced, and significantly less than predicted by the model.

Received: June, 2020

1st Revision: December, 2020

Accepted: May, 2021

DOI: 10.14254/2071-789X.2021/14-2/2

JEL Classification: H24, J22

Keywords: flat tax system, progressive tax system, labor-leisure preferences, labor market model, Slovakia