User:Nick Gardner /Sandbox

Taxes on employment income can affect the demand for labour as a result of the tax wedge that is driven between he cost of labour to employers and the net payment received by employees. The magnitude of the effect upon unemployment depends upon the price flexibility in the relevant labour market, because it depends upon the extent to which employees seek to pass a tax increase on to their employers

Taxes on employment income can affect the supply of labour as a result both of its price effect - to the extent that it makes employees try to compensate for their loss of after-tax earnings - and its substitution effect - to the extent that it makes employees willing to sacrifice their reduced net earnings in exchange for the unchanged the benefits of increased leisure. Empirical evidence tends to indicate that the effect is larger for female labour than for male labour and that it is greater for both when tax rates are progressive. The combined influence of employment income taxation and means-tested state benefits can also affect the supply of labour as a result of the operation of the unemployment and poverty traps.

Labour supply and taxes; Costas Meghir (Institute for Fiscal Studies and University College London) and David Phillips (Institute for Fiscal Studies)