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Substitution and Income Effects of Labor Income Taxation

Author

Listed:
  • Michael Graber

    (Statistics Norway)

  • Morten HÃ¥varstein

    (University of Chicago - Department of Economics; University of Oslo)

  • Magne Mogstad

    (University of Chicago - Department of Economics; Statistics Norway; NBER)

  • Gaute Torsvik

    (University of Oslo)

  • Ola L. Vestad

    (Statistics Norway)

Abstract

The elasticity of taxable income (ETI) parameter is a key quantity in empirical analysis of tax policy and labor supply. We examine when a commonly applied class of ETI estimands can be used to learn about individuals’ ETI parameters and their (un)compensated elasticities of labor supply. We provide conditions under which these estimands admit a causal interpretation, and apply the framework to a Norwegian tax reform reducing marginal tax rates. Estimated ETI parameters rise with income, implying greater responsiveness among high-income individuals. We further show how labor supply elasticities can be bounded or identified using these estimands and additional variation from lottery winnings. The results imply meaningful excess burden from taxation and suggest that reducing top-income tax rates could increase revenue, with implications for intertemporal substitution and Frisch elasticities across the income distribution.

Suggested Citation

  • Michael Graber & Morten HÃ¥varstein & Magne Mogstad & Gaute Torsvik & Ola L. Vestad, 2026. "Substitution and Income Effects of Labor Income Taxation," Working Papers 2026-45, Becker Friedman Institute for Research In Economics.
    • Handle: RePEc:bfi:wpaper:2026-45
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    File URL: https://repec.bfi.uchicago.edu/RePEc/pdfs/BFI_WP_2026-45.pdf
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    More about this item

    JEL classification:

    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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