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Income Tax Revenue Elasticities with Endogenous Labour Supply

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  • John Creedy
  • Norman Gemmell

    ()
    (The Treasury)

Abstract

It is important for the design of tax policy to be able to measure reliably the income elasticity of tax revenue. This gives the extent to which tax revenues change as a result of a change in earnings. Analytical expressions for income tax revenue elasticities treat earnings as exogenous, so that they do not accommodate the endogenous response of labour supply to the income tax system. This paper shows how these expression can be adapted to allow for endogenous labour supply. It identifies how far, and in what circumstances, labour supply effects are quantitatively important for revenue responsiveness estimates, both for individual taxpayers and in aggregate. It is shown that even a relatively simple tax-benefit structure can produce labour supply responses which considerably alter tax revenue elasticity calculations. It is shown that , even with modest leisure preferences, tax-wage elasticities are significantly higher that tax-income elasticities.

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File URL: http://www.treasury.govt.nz/publications/research-policy/wp/2002/02-22/twp02-22.pdf
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Bibliographic Info

Paper provided by New Zealand Treasury in its series Treasury Working Paper Series with number 02/22.

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Length: 22 pages
Date of creation: Dec 2002
Date of revision:
Handle: RePEc:nzt:nztwps:02/22

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Keywords: Income Taxation; Revenue; Elasticity; Labour Supply;

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  1. Creedy, John & Gemmell, Norman, 2002. " The Built-In Flexibility of Income and Consumption Taxes," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 16(4), pages 509-32, September.
  2. Bingley, Paul & Lanot, Gauthier, 2002. "The incidence of income tax on wages and labour supply," Journal of Public Economics, Elsevier, Elsevier, vol. 83(2), pages 173-194, February.
  3. Richard Disney & Sarah Smith, 2002. "The Labour Supply Effect of the Abolition of the Earnings Rule for Older Workers in the United Kingdom," CeRP Working Papers 17, Center for Research on Pensions and Welfare Policies, Turin (Italy).
  4. Blundell, Richard & Macurdy, Thomas, 1999. "Labor supply: A review of alternative approaches," Handbook of Labor Economics, Elsevier, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 27, pages 1559-1695 Elsevier.
  5. Creedy, John & Duncan, Alan, 2002. " Behavioural Microsimulation with Labour Supply Responses," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 16(1), pages 1-39, February.
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