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The Effects of Progressive Taxation on Labor Supply when Hours and Wages Are Jointly Determined

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  • Daniel Aaronson
  • Eric French

Abstract

This paper extends a standard intertemporal labor supply model to account for progressive taxation as well as the joint determination of hourly wages and hours worked. We show that these two factors can have implications for both estimating labor supply elasticities as well as for using these elasticities in tax analysis. Failure to account for wage-hours ties and progressive taxation may cause the hours response to marginal tax rate changes to be understated by 5 to 30 percent for men.

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File URL: http://jhr.uwpress.org/cgi/reprint/44/2/386
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Bibliographic Info

Article provided by University of Wisconsin Press in its journal Journal of Human Resources.

Volume (Year): 44 (2009)
Issue (Month): 2 ()
Pages:

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Handle: RePEc:uwp:jhriss:v:44:y:2009:i2:p386-408

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Web page: http://jhr.uwpress.org/

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References

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  1. Richard Blundell & Alan Duncan & Costas Meghir, 1995. "Estimating labour supply responses using tax reforms," IFS Working Papers W95/07, Institute for Fiscal Studies.
  2. MaCurdy, Thomas E, 1981. "An Empirical Model of Labor Supply in a Life-Cycle Setting," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1059-85, December.
  3. Slemrod, Joel, 1998. "Methodological Issues in Measuring and Interpreting Taxable Income Elasticities," National Tax Journal, National Tax Association, vol. 51(n. 4), pages 773-88, December.
  4. MaCurdy, Thomas E, 1983. "A Simple Scheme for Estimating an Intertemporal Model of Labor Supply and Consumption in the Presence of Taxes and Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(2), pages 265-89, June.
  5. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119.
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  7. Eric French, 2004. "The Effects of Health, Wealth and Wages on Labor Supply and Retirement Behavior," 2004 Meeting Papers 96, Society for Economic Dynamics.
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  13. Gilbert Ghez & Gary S. Becker, 1975. "The Allocation of Time and Goods over the Life Cycle," NBER Books, National Bureau of Economic Research, Inc, number ghez75-1, May.
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  18. Blomquist, N Soren, 1985. "Labour Supply in a Two-Period Model: The Effect of a Nonlinear Progressive Income Tax," Review of Economic Studies, Wiley Blackwell, vol. 52(3), pages 515-24, July.
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  26. Chul-In Lee, 2001. "Finite Sample Bias In Iv Estimation Of Intertemporal Labor Supply Models: Is The Intertemporal Substitution Elasticity Really Small?," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 638-646, November.
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Citations

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Cited by:
  1. Michael P. Keane, 2011. "Labor Supply and Taxes: A Survey," Journal of Economic Literature, American Economic Association, vol. 49(4), pages 961-1075, December.
  2. Kumar, Anil, 2008. "Labor supply, deadweight loss and tax reform act of 1986: A nonparametric evaluation using panel data," Journal of Public Economics, Elsevier, vol. 92(1-2), pages 236-253, February.
  3. Anil Kumar, 2012. "Nonparametric estimation of the impact of taxes on female labor supply," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 27(3), pages 415-439, 04.
  4. Anil Kumar, 2004. "Taxes, Deadweight Loss and Intertemporal Female Labor Supply: Evidence from Panel Data," Center for Policy Research Working Papers 61, Center for Policy Research, Maxwell School, Syracuse University.

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