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Identification of income-leisure preferences and evaluation of income tax policy

  • Charles Manski

    ()

    (Institute for Fiscal Studies and Northwestern University)

The merits of alternative income tax policies depend on the population distribution of preferences for income and leisure. Standard theory, which supposes that persons want more income and more leisure, does not predict how they resolve the tension between these desires. Empirical studies of labor supply have imposed strong preference assumptions that lack foundation. This paper examines anew the problem of inference on income-leisure preferences and considers the implications for evaluation of tax policy. I first perform a basic revealed-preference analysis assuming only that persons prefer more income and leisure. This shows that observation of a person's time allocation under a status quo tax policy may bound his allocation under a proposed policy or may have no implications, depending on the tax schedules and the person's status quo time allocation. I next explore the identifying power of two classes of assumptions that restrict the distribution of income-leisure preferences. One assumes that groups of persons who face different choice sets have the same preference distribution. The second restricts the shape of this distribution. The generic finding is partial identification of preferences. This implies partial prediction of tax revenue under proposed policies and partial knowledge of the welfare function for utilitarian policy evaluation.

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File URL: http://cemmap.ifs.org.uk/wps/cwp071212.pdf
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Paper provided by Centre for Microdata Methods and Practice, Institute for Fiscal Studies in its series CeMMAP working papers with number CWP07/12.

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Date of creation: Mar 2012
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Handle: RePEc:ifs:cemmap:07/12
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  1. Richard Blundell & Andrew Shephard, 2008. "Employment, hours of work and the optimal taxation of low income families," IFS Working Papers W08/01, Institute for Fiscal Studies.
  2. Soren Blomquist & Whitney Newey, 2002. "Nonparametric Estimation with Nonlinear Budget Sets," Econometrica, Econometric Society, vol. 70(6), pages 2455-2480, November.
  3. M. Keane & R. Mofitt, 1995. "A Structural Model of Multiple Welfare Program Participation and Labor Supply," Working Papers 95-4, Brown University, Department of Economics.
  4. Beggs, S. & Cardell, S. & Hausman, J., 1981. "Assessing the potential demand for electric cars," Journal of Econometrics, Elsevier, vol. 17(1), pages 1-19, September.
  5. Blass, Asher & Lach, Saul & Manski, Charles, 2008. "Using Elicited Choice Probabilities to Estimate Random Utility Models: Preferences for Electricity Reliability," CEPR Discussion Papers 7030, C.E.P.R. Discussion Papers.
  6. Emmanuel Saez & Joel Slemrod & Seth H. Giertz, 2012. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 50(1), pages 3-50, March.
  7. Richard Blundell & Antoine Bozio & Guy Laroque, 2011. "Extensive and intensive margins of labour supply: working hours in the US, UK and France," IFS Working Papers W11/01, Institute for Fiscal Studies.
  8. Michael P. Keane, 2011. "Labor Supply and Taxes: A Survey," Journal of Economic Literature, American Economic Association, vol. 49(4), pages 961-1075, December.
  9. Killingsworth, Mark R. & Heckman, James J., 1987. "Female labor supply: A survey," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 2, pages 103-204 Elsevier.
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