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The effects of progressive taxation on labor supply when hours and wages are jointly determined

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  • Daniel Aaronson
  • Eric French

Abstract

This paper extends a standard intertemporal labor supply model to account for progressive taxation as well as the joint determination of hourly wages and hours worked. We show, qualitatively and quantitatively, that these two factors have important implications for estimating the intertemporal elasticity of substitution. Furthermore, we show how to use this corrected parameter to interpret the labor supply response to a tax change. Failure to account for wage-hours ties within a progressive tax system leads to an hours response to a change in marginal tax rates that may be biased downwards by as much as 10 percent for men and 17 percent for women.

Suggested Citation

  • Daniel Aaronson & Eric French, 2002. "The effects of progressive taxation on labor supply when hours and wages are jointly determined," Working Paper Series WP-02-22, Federal Reserve Bank of Chicago.
  • Handle: RePEc:fip:fedhwp:wp-02-22
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Anil Kumar, 2004. "Taxes, Deadweight Loss and Intertemporal Female Labor Supply: Evidence from Panel Data," Center for Policy Research Working Papers 61, Center for Policy Research, Maxwell School, Syracuse University.
    2. John K. Dagsvik & Zhiyang Jia, 2014. "Labor supply as a discrete choice among latent jobs: Unobserved heterogeneity and identification," Discussion Papers 786, Statistics Norway, Research Department.
    3. Michael P. Keane, 2011. "Labor Supply and Taxes: A Survey," Journal of Economic Literature, American Economic Association, vol. 49(4), pages 961-1075, December.
    4. Anil Kumar, 2012. "Nonparametric estimation of the impact of taxes on female labor supply," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 27(3), pages 415-439, April.
    5. Bredemeier, Christian & Gravert, Jan & Juessen, Falko, 2016. "Estimating Labor-Supply Elasticities with Joint Borrowing Constraints of Couples," IZA Discussion Papers 10267, Institute of Labor Economics (IZA).
    6. Hotchkiss, Julie L. & Moore, Robert E. & Rios-Avila, Fernando, 2017. "Family Welfare and the Cost of Unemployment," FRB Atlanta Working Paper 2017-7, Federal Reserve Bank of Atlanta, revised 01 Jul 2019.
    7. Mario Alloza, 2016. "The Impact of Taxes on Income Mobility," Discussion Papers 1632, Centre for Macroeconomics (CFM).
    8. Kumar, Anil, 2008. "Labor supply, deadweight loss and tax reform act of 1986: A nonparametric evaluation using panel data," Journal of Public Economics, Elsevier, vol. 92(1-2), pages 236-253, February.

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    Keywords

    Taxation ; Labor supply ; Wages;

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