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Taxes and Labor Supply

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  • Jerry A. Hausman

Abstract

Over 75% of Federal tax revenue is raised through the income tax and FICA taxes. The potential effects on labor supply and economic welfare are important because of the large and increasing reliance on direct taxation. Over the past few years significant legislative changes have occurred with respect to taxation of labor: the 25% tax cuts,indexation,the tax credit for working spouses, and likely increases in FICA taxation.I reviewr ecent econometric work which measures the effect of taxes on labor supply and which analyzes the likely effects of tax law changes on labor supply and economic welfare.Sections 1 and 2 develop the theory and econometric techniques for models of labor supply with taxes. Section 3 discusses the various tax systemsin the U.S. In Section 4, I present empirical estimates for husbands'and wives' labor supply functions. The economic cost of the tax system is also estimated. In Section 5 the individual questionnaire data for high income individuals is reviewed. Lastly, in Section 6 evidence from the negative income tax experiments and for social security beneficiaries is considered. These latter groups face extremely high marginal tax rates so that evidence beyond that contained in other surveys of labor supplyis provided.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1102.

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Date of creation: Mar 1983
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Publication status: published as Hausman, Jerry and Paul Ruud. "Family Labor Supply With Taxes," American Economic Review, 1984, v74(2), 242-248.
Handle: RePEc:nbr:nberwo:1102

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  1. Keeley, Michael C, et al, 1978. "The Estimation of Labor Supply Models Using Experimental Data," American Economic Review, American Economic Association, vol. 68(5), pages 873-87, December.
  2. Diamond, P. A. & McFadden, D. L., 1974. "Some uses of the expenditure function in public finance," Journal of Public Economics, Elsevier, vol. 3(1), pages 3-21, February.
  3. Nakamura, Alice & Nakamura, Masao, 1981. "A Comparison of the Labor Force Behavior of Married Women in the United States and Canada, with Special Attention to the Impact of Income Taxes," Econometrica, Econometric Society, vol. 49(2), pages 451-89, March.
  4. Atkinson, A. B. & Stern, N. H., 1980. "On the switch from direct to indirect taxation," Journal of Public Economics, Elsevier, vol. 14(2), pages 195-224, October.
  5. Fields, Donald B & Stanbury, W T, 1970. "Incentives, Disincentives and the Income Tax: Further Empirical Evidence," Public Finance = Finances publiques, , vol. 25(3), pages 381-419.
  6. Rosen, Harvey S, 1976. "Taxes in a Labor Supply Model with Joint Wage-Hours Determination," Econometrica, Econometric Society, vol. 44(3), pages 485-507, May.
  7. Kay, J. A., 1980. "The deadweight loss from a tax system," Journal of Public Economics, Elsevier, vol. 13(1), pages 111-119, February.
  8. Hausman, Jerry A., 1979. "The econometrics of labor supply on convex budget sets," Economics Letters, Elsevier, vol. 3(2), pages 171-174.
  9. Wales, Terence J, 1973. "Estimation of a Labor Supply Curve for Self-Employed Business Proprietors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 14(1), pages 69-80, February.
  10. Wales, T J & Woodland, A D, 1979. "Labour Supply and Progressive Taxes," Review of Economic Studies, Wiley Blackwell, vol. 46(1), pages 83-95, January.
  11. Deaton,Angus & Muellbauer,John, 1980. "Economics and Consumer Behavior," Cambridge Books, Cambridge University Press, number 9780521296762, April.
  12. Neary, J. P. & Roberts, K. W. S., 1980. "The theory of household behaviour under rationing," European Economic Review, Elsevier, vol. 13(1), pages 25-42, January.
  13. Ham, John C, 1982. "Estimation of a Labour Supply Model with Censoring Due to Unemployment and Underemployment," Review of Economic Studies, Wiley Blackwell, vol. 49(3), pages 335-54, July.
  14. Hanoch, Giora & Honig, Marjorie, 1978. "The labor supply curve under income maintenance programs," Journal of Public Economics, Elsevier, vol. 9(1), pages 1-16, February.
  15. Brown, C V & Levin, Eric & Ulph, D T, 1976. "Estimates of Labour Hours Supplied by Married Male Workers in Great Britain," Scottish Journal of Political Economy, Scottish Economic Society, vol. 23(3), pages 261-77, November.
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