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Designing Optimal Taxes With a Microeconometric Model of Household Labour Supply

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Author Info
Rolf Aaberge (Research Department, Statistics Norway, Oslo, Norway)
Ugo Colombino (CHILD, Department of Economics, Turin, Italy)

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Abstract

This paper is concerned with the empirical analyses of optimal taxation, adopting Equality of Outcome (EO) as well as Equality of Opportunity (EOp) as evaluation criteria. The EOp- and EO-criteria provide alternative methods for summarizing the efficiency-equality trade-off in the distribution of individual welfare. We also compare the results depending on whether we use income or money-metric utility as a measure of individual welfare. We estimate micro-econometric models of household labour supply and corresponding individual welfare measures based on 1995 Norwegian data for both married couples and singles. We then use these models to simulate behavioural responses and welfare gains and losses of various constant-revenue four-parameter tax rules, i.e. the tax rules defined by a lump-sum transfer (positive or negative), two marginal tax rates and a “kink point” that produces the same revenue collected with the observed 1995 rules. Using the various EOp- and EO- critera as a basis for evaluating and comparing these tax rules, EOp- and EO-optimal tax rules are identified.

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Paper provided by EconWPA in its series Public Economics with number 0510013.

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Length: 29 pages
Date of creation: 13 Oct 2005
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Handle: RePEc:wpa:wuwppe:0510013

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Keywords: Optimal Taxation; Labour Supply; Microeconometric Models;

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Find related papers by JEL classification:
D6 - Microeconomics - - Welfare Economics
D7 - Microeconomics - - Analysis of Collective Decision-Making
H - Public Economics

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References listed on IDEAS
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Aaberge, Rolf & Flood, Lennart, 2008. "Evaluation of an In-Work Tax Credit Reform in Sweden: Effects on Labor Supply and Welfare Participation of Single Mothers," IZA Discussion Papers 3736, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  2. Ericson, Peter & Flood, Lennart & Wahlberg, Roger, 2009. "SWEtaxben: A Swedish Tax/Benefit Micro Simulation Model and an Evaluation of a Swedish Tax Reform," IZA Discussion Papers 4106, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  3. Thor O. Thoresen, Jørgen Aasness and Zhiyang Jia, 2008. "More realistic estimates of revenue changes from tax cuts," Discussion Papers 545, Research Department of Statistics Norway. [Downloadable!]
  4. Alberto Alesina & Andrea Ichino & Loukas Karabarbounis, 2007. "Gender Based Taxation and the Division of Family Chores," NBER Working Papers 13638, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Peter Haan & Katharina Wrohlich, 2007. "Optimal Taxation: The Design of Child Related Cash- and In-Kind-Benefits," IZA Discussion Papers 3128, Institute for the Study of Labor (IZA). [Downloadable!]
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  6. Haan, Peter & Navarro, Dolores, 2008. "Optimal Income Taxation of Married Couples: An Empirical Analysis of Joint and Individual Taxation," IZA Discussion Papers 3819, Institute for the Study of Labor (IZA). [Downloadable!]
  7. Colombino U & Locatelli M & Narazani E & O'donoghue C & Shima I, 2008. "Behavioural And Welfare Effects Of Basic Income Policies: A Simulation For European Countries," EUROMOD Working Papers EM5/08, EUROMOD at the Institute for Social and Economic Research. [Downloadable!]
    Other versions:
  8. Peter Haan & Dolores Navarro, 2008. "Optimal Income Taxation of Married Couples: An Empirical Analysis of Joint and Individual Taxation," Discussion Papers of DIW Berlin 838, DIW Berlin, German Institute for Economic Research. [Downloadable!]
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