The standard public finance analysis of the welfare cost of labour income taxation is based on the estimation of labour supply functions that treat unemployed individuals as non-participants. This paper applies econometric models of multinomial discrete choice to the labour market, explicitly allowing individuals to be in any of three possible states (employment, unemployment and non-participation). Based on these estimates, we present calculations of the dead-weight loss of taxes, which turn out to be much larger than the loss suggested by the standard literature.
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Paper provided by College Dublin, Department of Political Economy- in its series Papers with number
99/2.
Length: 31 pages Date of creation: 1999 Date of revision: Handle: RePEc:fth:dublec:99/2
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Find related papers by JEL classification: H2 - Public Economics - - Taxation, Subsidies, and Revenue J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search J68 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Public Policy C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models
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