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Taxation and Family Labor Supply

  • Alexander Gelber

    (Harvard University)

I examine the impact of taxation on family labor supply and test economic models of the family by analyzing responses to the Tax Reform of 1991 in Sweden, known as the "tax reform of the century" because of its large magnitude. Using detailed administrative panel data on approximately 11% of the married Swedish population, I ...nd that husbands and wives react substantially to their own marginal tax rates and to their spouses’rates. The estimates imply that husbands’leisure and wives’leisure are complements in the full sample. I test and reject a set of models in which the family maximizes a single utility function. The standard econometric labor supply specification, in which one spouse reacts to the other spouse’ income as if it were s unearned income, yields biased coe¢ cient estimates. Uncompensated labor supply elasticities are over-estimated by a factor of more than three, and income e¤ects are of the wrong sign. Overall, the results suggest that there is interplay between spouses’ labor supply decisions, and that taking account of this joint aspect of their decision- making leads to new conclusions about labor supply responses to taxation.

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Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 249.

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Date of creation: 2008
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Handle: RePEc:red:sed008:249
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  1. Aronsson, Thomas & Wikstrom, Magnus, 1994. "Nonlinear Taxes in a Life-Cycle Consistent Model of Family Labour Supply: Erratum," Empirical Economics, Springer, vol. 19(4), pages 717-18.
  2. Lindsey, Lawrence B., 1987. "Individual taxpayer response to tax cuts: 1982-1984 : With implications for the revenue maximizing tax rate," Journal of Public Economics, Elsevier, vol. 33(2), pages 173-206, July.
  3. Richard Blundell & Alan Duncan & Costas Meghir, 1995. "Estimating labour supply responses using tax reforms," IFS Working Papers W95/07, Institute for Fiscal Studies.
  4. Henrik Jacobsen Kleven & Claus Thustrup Kreiner & Emmanuel Saez, 2009. "The Optimal Income Taxation of Couples," Econometrica, Econometric Society, vol. 77(2), pages 537-560, 03.
  5. Esther Duflo, 2003. "Grandmothers and Granddaughters: Old-Age Pensions and Intrahousehold Allocation in South Africa," World Bank Economic Review, World Bank Group, vol. 17(1), pages 1-25, June.
  6. Åsa Hansson, 2007. "Taxpayers' responsiveness to tax rate changes and implications for the cost of taxation in Sweden," International Tax and Public Finance, Springer, vol. 14(5), pages 563-582, October.
  7. Gustman, Alan L & Steinmeier, Thomas L, 2000. "Retirement in Dual-Career Families: A Structural Model," Journal of Labor Economics, University of Chicago Press, vol. 18(3), pages 503-45, July.
  8. Aronsson, Thomas & Wikstrom, Magnus, 1994. "Nonlinear Taxes in a Life-Cycle Consistent Model of Family Labour Supply," Empirical Economics, Springer, vol. 19(1), pages 1-17.
  9. Francine D. Blau & Lawrence M. Kahn, 2007. "Changes in the Labor Supply Behavior of Married Women: 1980–2000," Journal of Labor Economics, University of Chicago Press, vol. 25, pages 393-438.
  10. Nada Eissa, 1995. "Taxation and Labor Supply of Married Women: The Tax Reform Act of 1986 as a Natural Experiment," NBER Working Papers 5023, National Bureau of Economic Research, Inc.
  11. Loukas Karabarbounis & Andrea Ichino & Alberto Alesina, 2008. "Gender based Taxation," 2008 Meeting Papers 500, Society for Economic Dynamics.
  12. Wojciech Kopczuk & Emmanuel Saez & Jae Song, 2007. "Uncovering the American Dream: Inequality and Mobility in Social Security Earnings Data since 1937," NBER Working Papers 13345, National Bureau of Economic Research, Inc.
  13. Udry, Christopher, 1996. "Gender, Agricultural Production, and the Theory of the Household," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 1010-46, October.
  14. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, March.
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