Graduated income tax rates and transfer programs create piecewise-linear budget constraints that consist of budget segments and kink points. With any change in these tax rules, each individual may switch between a kink point and a budget segment, between two budget segments, or between two kink points. With errors in the estimated labor supply equation, the new choice is uncertain, and so the welfare effects of a tax change are uncertain. We propose a simulation-based method to compute expected welfare effects that is easy to implement and that fully accounts for uncertainties about choices around kink points. Our method also provides information about expected changes in working hours.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
10139.
Length: Date of creation: Dec 2003 Date of revision: Handle: RePEc:nbr:nberwo:10139
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Find related papers by JEL classification: H2 - Public Economics - - Taxation, Subsidies, and Revenue J2 - Labor and Demographic Economics - - Demand and Supply of Labor
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[Downloadable!] (restricted)
Hausman, Jerry A., 1985.
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Dickens, William T & Lundberg, Shelly J, 1993.
"Hours Restrictions and Labor Supply,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(1), pages 169-92, February.
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