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Estimates of employment and welfare effects of personal labour income taxation in a flat-tax country : The case of Estonia

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  • Karsten Staehr

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Abstract

This paper presents estimates of the employment and welfare effects of personal labour income taxation in Estonia. The labour supply decision of individuals is estimated based on data from the 2005 Estonian Labour Force Survey. Economic incentives are found to affect the participation decisions of individuals, but not the number of hours worked by individuals already working. The participation elasticities are higher for individuals in the middle income groups than for individuals in the low and high income groups. Increasing the proportional tax rate by 1 percentage point is found to reduce total employment by 0.35 percentage points. The baseline estimate of the marginal cost of public funds is 1.6 if the proportional tax rate is increased and 1.8 if the basic exemption is lowered. The marginal cost of public funds varies across different income groups, which may suggest possible gains in efficiency from reallocating the taxation burden of the existing system of proportional taxation. The employment and welfare estimates are subject to substantial

Suggested Citation

  • Karsten Staehr, 2008. "Estimates of employment and welfare effects of personal labour income taxation in a flat-tax country : The case of Estonia," Bank of Estonia Working Papers 2008-03, Bank of Estonia, revised 30 Oct 2008.
  • Handle: RePEc:eea:boewps:wp2008-03
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    File URL: http://www.eestipank.ee/sites/eestipank.ee/files/publication/en/WorkingPapers/2008/_wp_308.pdf
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    References listed on IDEAS

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    Cited by:

    1. Indrek Saar, 2011. "Optimal alcohol taxation: Simulation results for Estonia," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 11(1), pages 65-90, July.

    More about this item

    Keywords

    taxation; labour supply; welfare; excess burden;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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