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The Effect of Income Taxation on Consumption and Labor Supply

  • James P. Ziliak

    (University of Kentucky)

  • Thomas J. Kniesner

    (Syracuse University)

We estimate the incentive effects of income taxation in a life-cycle model of consumption and labor supply without intratemporal strong separability. We find that consumption and hours worked are direct complements in utility; both increase with a compensated increase in the net wage. The compensated net wage elasticity is about 0.3, nearly double estimates for U.S. men from a linear labor supply specification. Estimated intertemporal elasticities indicate significant intertemporal smoothing of utility. The estimated marginal welfare cost of government revenue is 6%20%, which is about half the estimated welfare cost when additivity between consumption and leisure is incorrectly imposed.

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Article provided by University of Chicago Press in its journal Journal of Labor Economics.

Volume (Year): 23 (2005)
Issue (Month): 4 (October)
Pages: 769-796

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Handle: RePEc:ucp:jlabec:v:23:y:2005:i:4:p:769-796
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