Iceland's Natural Experiment in Supply-Side Economics
The move to a pay-as-you-earn income tax system in Iceland in 1987-1988 made income earned in 1987 tax-free. Using a sample of 9,274 individuals for the years 1986, 1987 and 1988, we calculate the labour-supply response of this change and find that total labour supply rose by 6.7% in 1987 over the average of 1986 and 1988 when we correct for entry in 1988. This consists of an 8.6% increase in weeks supplied by those already in the labour market in 1986 and a 1.9% decline due to entry/exit. The elasticity of weeks worked to the rise in after-tax wages was 0.41 for men and 0.11 for women. While the participation rate of women increased somewhat in our sample, participation by men fell.
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References listed on IDEAS
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- Jerry A. Hausman, 1983.
"Stochastic Problems in the Simulation of Labor Supply,"
in: Behavioral Simulation Methods in Tax Policy Analysis, pages 47-82
National Bureau of Economic Research, Inc.
- Jerry A. Hausman, 1981. "Stochastic Problems in the Simulation of Labor Supply," NBER Working Papers 0788, National Bureau of Economic Research, Inc.
- Eissa, Nada & Liebman, Jeffrey B, 1996.
"Labor Supply Response to the Earned Income Tax Credit,"
The Quarterly Journal of Economics,
MIT Press, vol. 111(2), pages 605-37, May.
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- Don Fullerton, 1980.
"On the Possibility of an Inverse Relationship between Tax Rates and Government Revenues,"
NBER Working Papers
0467, National Bureau of Economic Research, Inc.
- Fullerton, Don, 1982. "On the possibility of an inverse relationship between tax rates and government revenues," Journal of Public Economics, Elsevier, vol. 19(1), pages 3-22, October.
- Martin Feldstein, 1986.
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NBER Working Papers
1792, National Bureau of Economic Research, Inc.
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