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Taxes, Deadweight Loss and Intertemporal Female Labor Supply: Evidence from Panel Data

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Author Info
Anil Kumar
Abstract

Very few existing studies have estimated female labor supply elasticities using a U.S. panel data set, although cross-sectional studies abound. Also, most existing studies have done so in a static framework. I make an attempt to fill the gap in this literature by estimating a lifecycle-consistent specification with taxes, in a limited dependent variable framework, on a panel of married females from the PSID. Both parametric random effects and semiparametric fixed effects methods are applied. I find evidence of larger substitution effects than found in female labor supply literature with taxes, suggesting considerable distortionary effects from income taxation. The uncompensated wage elasticity is estimated at 1.4, which is comparable to estimates found in other labor supply studies with taxes. The income effect in a lifecycle-consistent specification is negative and very small. The estimate of compensated elasticity for females in the sample is 1.4 using random effects estimator and 1.35 using semiparametric fixed effect estimator. I estimate exact deadweight loss from taxes and find that deadweight loss from a 20% increase in the marginal tax rate is about 30% of tax revenue collected, evaluated at the sample mean. The deadweight loss from taxation of wife's labor income from 1980-1987, for a median household, is estimated to be 57% of tax revenue as opposed to 49% for a switch to a revenue-neutral proportional tax system. Finally, the intertemporal preference parameters are estimated using GMM.

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Paper provided by Center for Policy Research, Maxwell School, Syracuse University in its series Center for Policy Research Working Papers with number 61.

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Length: 60 pages
Date of creation: Jun 2004
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Handle: RePEc:max:cprwps:61

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Find related papers by JEL classification:
C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Semiparametric and Nonparametric Methods
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data
J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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  4. Heckman, James J, 1979. "Sample Selection Bias as a Specification Error," Econometrica, Econometric Society, vol. 47(1), pages 153-61, January. [Downloadable!] (restricted)
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  7. Burtless, Gary & Hausman, Jerry A, 1978. "The Effect of Taxation on Labor Supply: Evaluating the Gary Negative Income Tax Experiments," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1103-30, December. [Downloadable!] (restricted)
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  8. Richard Blundell & Alan Duncan & Costas Meghir, 1998. "Estimating Labor Supply Responses Using Tax Reforms," Econometrica, Econometric Society, vol. 66(4), pages 827-862, July.
    Other versions:
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  15. Hausman, Jerry A, 1981. "Exact Consumer's Surplus and Deadweight Loss," American Economic Review, American Economic Association, vol. 71(4), pages 662-76, September. [Downloadable!] (restricted)
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  17. Colombino, Ugo & Del Boca, Daniela, 1989. "The Effect Of Taxes On Labor Supply In Italy," Working Papers 89-30, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
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