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Estimates of employment and welfare effects of personal labour income taxation in a flat-tax country : The case of Estonia

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Author Info
Karsten Staehr ()
Abstract

This paper presents estimates of the employment and welfare effects of personal labour income taxation in Estonia. The labour supply decision of individuals is estimated based on data from the 2005 Estonian Labour Force Survey. Economic incentives are found to affect the participation decisions of individuals, but not the number of hours worked by individuals already working. The participation elasticities are higher for individuals in the middle income groups than for individuals in the low and high income groups. Increasing the proportional tax rate by 1 percentage point is found to reduce total employment by 0.35 percentage points. The baseline estimate of the marginal cost of public funds is 1.6 if the proportional tax rate is increased and 1.8 if the basic exemption is lowered. The marginal cost of public funds varies across different income groups, which may suggest possible gains in efficiency from reallocating the taxation burden of the existing system of proportional taxation. The employment and welfare estimates are subject to substantial

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Paper provided by Bank of Estonia in its series Bank of Estonia Working Papers with number 2008-03.

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Date of creation: 30 Oct 2008
Date of revision: 30 Oct 2008
Handle: RePEc:eea:boewps:wp2008-03

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Postal: Estonia bld. 13, 15095 Tallinn, ESTONIA
Phone: +3726680719
Fax: +3726680900
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Web page: http://www.bankofestonia.info
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Postal: Estonia bld. 13, 15095 Tallinn, ESTONIA
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Related research
Keywords: taxation; labour supply; welfare; excess burden;

Find related papers by JEL classification:
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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