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Does Labor Supply Respond to a Flat Tax? Evidence from the Russian Tax Reform

  • Duncan, Denvil

    ()

    (Indiana University)

  • Peter, Klara Sabirianova

    ()

    (University of North Carolina, Chapel Hill)

We exploit the exogenous change in marginal tax rates created by the Russian flat tax reform of 2001 to identify the effect of taxes on labor supply of males and females. We apply the weighted difference-in-difference regression approach and instrumental variables to the labor supply function estimated on individual panel data. The mean regression results indicate that the tax reform led to a statistically significant increase in male hours of work but had no effect on that of females. However, we find a positive response to tax changes at both tails of the female hour distribution. We also find that the reform increased the probability of finding a job among both males and females. Despite significant variation in individual responses, the aggregate labor supply elasticities are trivial and suggest that reform-induced changes in labor supply were an unlikely explanation for the amplified personal income tax revenues that followed the reform.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4257.

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Length: 55 pages
Date of creation: Jun 2009
Date of revision:
Handle: RePEc:iza:izadps:dp4257
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  1. Gorodnichenko, Yuriy & Peter, Klara Sabirianova & Stolyarov, Dmitriy, 2009. "Inequality and Volatility Moderation in Russia: Evidence from Micro-Level Panel Data on Consumption and Income," IZA Discussion Papers 4233, Institute for the Study of Labor (IZA).
  2. Gorodnichenko, Yuriy & Martinez-Vazquez, Jorge & Peter, Klara Sabirianova, 2007. "Myth and Reality of Flat Tax Reform: Micro Estimates of Tax Evasion Response and Welfare Effects in Russia," IZA Discussion Papers 3267, Institute for the Study of Labor (IZA).
  3. Immervoll, Herwig & Kleven, Henrik & Kreiner, Claus Thustrup & Saez, Emmanuel, 2004. "Welfare Reform in European Countries: A Micro-Simulation Analysis," CEPR Discussion Papers 4324, C.E.P.R. Discussion Papers.
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  17. Chul-In Lee, 2001. "Finite Sample Bias In Iv Estimation Of Intertemporal Labor Supply Models: Is The Intertemporal Substitution Elasticity Really Small?," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 638-646, November.
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  20. Matveenko Vladimir & Saveliev Peter, 2005. "Labor Supply in Russia: Studying the Role of Outside Options of the Employed," EERC Working Paper Series 00-215e, EERC Research Network, Russia and CIS.
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  22. Karen Smith Conway, 1997. "Labor Supply, Taxes, And Government Spending: A Microeconometric Analysis," The Review of Economics and Statistics, MIT Press, vol. 79(1), pages 50-67, February.
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  26. Lemieux, Thomas & Fortin, Bernard & Frechette, Pierre, 1994. "The Effect of Taxes on Labor Supply in the Underground Economy," American Economic Review, American Economic Association, vol. 84(1), pages 231-54, March.
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