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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, qualitatively and quantitatively, that these two factors have important implications for estimating the intertemporal elasticity of substitution. Furthermore, we show how to use this corrected parameter to interpret the labor supply response to a tax change. Failure to account for wage-hours ties within a progressive tax system leads to an hours response to a change in marginal tax rates that may be biased downwards by as much as 10 percent for men and 17 percent for women.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-02-22.

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Date of creation: 2002
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Handle: RePEc:fip:fedhwp:wp-02-22

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Keywords: Taxation ; Labor supply ; Wages;

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References

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  1. Holtz-Eakin, Douglas & Newey, Whitney & Rosen, Harvey S, 1988. "Estimating Vector Autoregressions with Panel Data," Econometrica, Econometric Society, vol. 56(6), pages 1371-95, November.
  2. 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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  25. Browning, Martin & Deaton, Angus & Irish, Margaret, 1985. "A Profitable Approach to Labor Supply and Commodity Demands over the Life-Cycle," Econometrica, Econometric Society, vol. 53(3), pages 503-43, May.
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Citations

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Cited by:
  1. Michael Keane, 2010. "Labor Supply and Taxes: A Survey," Working Paper Series 160, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  2. Anil Kumar, 2005. "Nonparametric estimation of the impact of taxes on female labor supply," Working Papers 0505, Federal Reserve Bank of Dallas.
  3. 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.
  4. 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.

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