IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/10138.html
   My bibliography  Save this paper

Regeneration, Labour Supply and the Welfare Costs of Taxes

Author

Listed:
  • Edgar Cudmore
  • John Whalley

Abstract

This paper sets out alternatives to the traditional model of labour supply used to analyse the welfare costs of income and/or sales taxes when preferences are defined over goods and leisure and the market wage yields the slope of the budget constraint. The innovation in our work is to assume that some or all of non market time is used to regenerate the productivity of labour through rest and relaxation. This model has no closed form solution, but we can work with the first order conditions numerically for specific functional forms using non linear solution software. We generate a number of alternative parameterizations of this model through a series of calibrations to the same synthetic base case data set. Across the resulting parameterizations the welfare costs of taxes vary substantially (by a factor of twenty fold in some counterfactual analyses), even though they all involve calibration to the same base case data and labour supply elasticity. These results thus suggest that a small and seemingly plausible departure from a standard model (even if not in closed form) that has dominated the economic literature for many years can yield substantial change for perspectives on policy interventions.

Suggested Citation

  • Edgar Cudmore & John Whalley, 2003. "Regeneration, Labour Supply and the Welfare Costs of Taxes," NBER Working Papers 10138, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:10138
    Note: PE
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w10138.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Richard Blundell & Alan Duncan & Costas Meghir, 1998. "Estimating Labor Supply Responses Using Tax Reforms," Econometrica, Econometric Society, vol. 66(4), pages 827-862, July.
    2. Blundell, Richard & Macurdy, Thomas, 1999. "Labor supply: A review of alternative approaches," Handbook of Labor Economics,in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 27, pages 1559-1695 Elsevier.
    3. Banks, James & Blundell, Richard & Lewbel, Arthur, 1996. "Tax Reform and Welfare Measurement: Do We Need Demand System Estimation?," Economic Journal, Royal Economic Society, vol. 106(438), pages 1227-1241, September.
    4. Shoven,John B. & Whalley,John, 1992. "Applying General Equilibrium," Cambridge Books, Cambridge University Press, number 9780521266550.
    5. John C. Ham & Kevin T. Reilly, 2002. "Testing Intertemporal Substitution, Implicit Contracts, and Hours Restriction Models of the Labor Market Using Micro Data," American Economic Review, American Economic Association, vol. 92(4), pages 905-927, September.
    6. Biddle, Jeff E & Hamermesh, Daniel S, 1990. "Sleep and the Allocation of Time," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 922-943, October.
    7. Jonas D. M. Fisher, 2001. "A real explanation for heterogeneous investment dynamics," Working Paper Series WP-01-14, Federal Reserve Bank of Chicago.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jonas D. M. Fisher, 2007. "Why Does Household Investment Lead Business Investment over the Business Cycle?," Journal of Political Economy, University of Chicago Press, vol. 115, pages 141-168.

    More about this item

    JEL classification:

    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:10138. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: () or (Joanne Lustig). General contact details of provider: http://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.