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Labor supply, income distribution, and tax progressivity in a search model

Author

Listed:
  • Fu Zhiming
  • Wu Liang

    (School of Economics, Sichuan University, No. 24 South Section 1, Yihuan Road, Chengdu 610065, China)

  • Zhuang Ziguan

    (School of Finance, Zhongnan University of Economics and Law, No. 182 Nanhu Avenue, East Lake High-tech Development Zone, Wuhan 430073, China)

Abstract

We develop a search model with risk-averse households to study the impact of tax progressivity on labor supply and income inequality across education groups. Labor supply responses are considered along both intensive and extensive margins. Our quantitative results are consistent with those of the existing empirical literature. First, we find that a decline in tax progressivity associated with the Tax Reform Act of 1986 has a significant impact on the aggregate labor supply with approximately 61 percent occurred along the extensive margin. Second, households differ in their labor and income responses to tax reform. A decline in tax progressivity changes the income composition of each household by affecting labor supplies and asset holdings. This leads to an increase in income inequality. Therefore, the tax share paid by the most educated group rises due to an increase in capital income after tax reforms are instituted.

Suggested Citation

  • Fu Zhiming & Wu Liang & Zhuang Ziguan, 2019. "Labor supply, income distribution, and tax progressivity in a search model," The B.E. Journal of Macroeconomics, De Gruyter, vol. 19(1), pages 1-18, January.
    • Handle: RePEc:bpj:bejmac:v:19:y:2019:i:1:p:18:n:7
    DOI: 10.1515/bejm-2017-0185
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    References listed on IDEAS

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    More about this item

    Keywords

    income inequality; labor supply; progressive taxation;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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