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Labor Supply Behavior and the Design of Tax and Transfer Policy
Abstract
This paper argues that recent empirical evidence on labor supply behavior - showing stronger participation responses than hours-of-work responses - has important implications for the design of tax and transfer policy. Based on a review of recent research in this field, we conclude the following: (i) Conventional ways of evaluating the impact of tax-transfer reforms on economic efficiency have to be revised. (ii) Optimal redistributional policies may well involve negative marginal tax rates at the bottom of the earnings distribution. (iii )T he introduction of the Earned Income Tax Credit (EITC) in the United States in the mid-1970s and the large expansions of the credit during the past two decades did not involve a trade-off between efficiency and equality as suggested by previous estimates. Instead, the EITC has improved both equality and efficiency. (iv) For most European countries, redistribution to the working poor involves a substantially lower trade-off between efficiency and equality than traditional redistributional policies targeted to those out of work.
... The fiscal externality logic clarifies which causal effects are and are not necessary for estimating program costs for purposes of welfare analysis. Specifically, it is sufficient to estimate the net impact of the increase in benefit levels on net government revenue, without decomposing the impact into these various channels (Kleven and Kreiner 2005). For example, a large literature has analyzed a wide variety of potential effects of an increase in the level of unemployment insurance benefits on a range of behaviors including unemployment duration (for a recent review, see Shmieder and von Wachter 2016), exit rates into unemployment (Jäger, Schoefer, and Zweimüller 2019) and re-employment wages (Nekoei and Weber 2017). ...
... Likewise, the idea of a fiscal externality is not new: It traces back at least to Ramsey (1927), although its crystallization and importance has become more salient recently (for example , Feldstein 1999;Saez 2004;Kleven and Kreiner 2005;Chetty and Saez 2010). Finally, the key insight that when small shifts in incentives lead to behavioral shifts, the net welfare effect on individuals is zero has been used extensively in previous empirical welfare analyses, including Harberger (1964). ...
We describe a frame work for empirical welfare analysis that uses the causal estimates of a policy’s impact on net government spending. This framework provides guidance for which causal effects are (and are not) needed for empirical welfare analysis of public policies. The key ingredient is the construction of each policy’s marginal value of public funds (MVPF). The MVPF is the ratio of beneficiaries’ willingness to pay for the policy to the net cost to the government. We discuss how the MVPF relates to “traditional” welfare analysis tools such as the marginal excess burden and marginal cost of public funds. We show how the MVPF can be used in practice by applying it to several canonical empirical applications from public finance, labor, development, trade, and industrial organization.
... As we have explained elsewhere (e.g. Kleven and Kreiner, 2005), it is very important to distinguish explicitly between labor supply adjustments along the intensive margin (the number of hours worked) and along the extensive margin (the number of employed individuals). Moreover, a realistic model must be consistent with empirical distributions of hours worked showing almost no workers a low weekly hours of work. ...
... 11) where S B and S E are defined in eqs(3.10) and(3.13). ...
... An EITC was implemented inDenmark much later (2004) than in the United States and, therefore, cannot explain the big drop in unemployment, which took place earlier. Moreover, participation tax rates continue to be high in Denmark because of the high out-of-work benefits(Kleven and Kreiner 2005;Immervoll et al. 2007). ...
Denmark is one of the richest countries in the world and achieves this in combination with low inequality, low unemployment, and high-income security. This performance is often attributed to the Danish labor market model characterized by what has become known as flexicurity. This essay describes and evaluates Danish flexicurity. The Danish experience shows that flexicurity in itself, that is, flexible hiring and firing rules for firms combined with high income security for workers, is insufficient for successful outcomes. The flexicurity policy also needs to include comprehensive active labor market programs (ALMPs) with compulsory participation for recipients of unemployment compensation. Denmark spends more on active labor market programs than any other OECD country. We review theory showing how ALMPs can mitigate adverse selection and moral hazard problems associated with high income security and review empirical evidence on the effectiveness of ALMPs from the ongoing Danish policy evaluation, which includes a systematic use of randomized experiments. We also discuss the aptness of flexicurity to meet challenges from globalization, automation, and immigration and the trade-offs that the United States (or other countries) would face in adopting a flexicurity policy.
... Labor income taxes distort the labor-leisure choice and give rise to a loss of economic efficiency. As discussed in Eissa et al. (2008) and Kleven and Kreiner (2005), the welfare effect of tax reform is determined by the behavioral effect on tax revenue. Since non-employment is voluntary, the marginal entrant is indifferent between working or not working. ...
I analyze the effect of income tax policy changes on labor force participation of older workers. I exploit two age-targeted policy initiatives to promote work at older ages simultaneously implemented in Sweden in 2007: an earned income tax credit and a payroll tax credit for workers above age 65. Using an age-based discontinuity in eligibility criteria, I conduct a difference-in-differences analysis with the reform as an instrument for the net-of-tax rate. I find a participation elasticity with respect to the net-of-participation-tax rate of about 0.22 in the year following the 65th birthday for individuals who were working four years earlier.
... More recently,Flood et al. (2003) con…rm small hour elasticities for this country. For Denmark, we are not aware of any results based on structural models butKleven and Kreiner (2005) actually indicate that elasticities for Sweden may give some indication. Elasticities for singles (pooled men and women) using variations in the Danish tax system are obtained byBingley and Lanot (2002), with preferred estimates using IV of around :14. ...
How labor supply responsiveness di¤ers across countries may explain, or be the consequence of di¤erent labor market institutions and tax-bene…t policy regimes. We suggest the …rst large-scale international comparison of elasticities between coun-tries, relying on data for 17 EU countries and the US and a common empirical approach based on a discrete-choice model fully accounting for national tax-bene…t systems. We …nd that wage-elasticities span between :1 and :6 for married women and single mothers, and show even less variations (and smaller magnitudes) for men. We provide an extensive robustness check to various modeling assumptions. Using a decomposition approach, we show that di¤erences in demographic composition ex-plain little of the international variation, suggesting signi…cant di¤erences in work preferences, or non-simulated institutions, across countries.s visit to the ECASS and ISER and supported by the Access to Research Infrastructures action (EU IHP Program) and the Deutsche Forschungsgemeinschaft (PE1675). We are indebted to the EUROMOD consortium and to Daniel Feenberg and the NBER for granting us access to TAXSIM and for help with the simulations.
... Under quite general conditions, the efficiency effect of a tax reform is given by the impact of changed behavior on government revenue (e.g. Kleven and Kreiner, 2005). Hence, all those behavioral responses which affect government revenue -in other words, all those kinds of behavior which are taxed -are important to the efficiency of policy reforms. ...
... There are two pathways to qualify for Medicaid. First, an individual is intensive margin response (Heckman, 1993, Kleven and Kreiner, 2005, Saez, 2002). In addition, in the data the difference in labor supply between the healthy and the unhealthy is more pronounced along the extensive margin. ...
Having low income is one of the requirements for Medicaid eligibility. Given that earning ability is unobservable, once an individual with high labor income stops working it is impossible to distinguish him from those whose po-tential labor income is low. This can affect the ability of Medicaid to target the most disadvantaged people given that a large fraction of its beneficiaries do not work. In this paper we ask two questions: 1) Does Medicaid signif-icantly distort work incentives? 2) Can the insurance-incentives trade-off of Medicaid be improved without changing the size of the redistribution in the economy? Our tool is a general equilibrium model with heterogeneous agents calibrated using the Medical Expenditure Panel Survey Dataset to match the life-cycle patterns of employment and insurance take-up behavior as well as the key aggregate statistics. We find that around 20% of Medicaid enrollees do not work in order to be eligible. These distortions are costly for the econ-omy: if Medicaid eligibility could be linked to (unobservable) productivity the resulting ex-ante welfare gains are equivalent to 1.5% of the annual con-sumption. We show that asset testing can achieve a similar outcome but only if asset limits are allowed to be different for workers and non-workers.
... In the first case they would not be affected by the tax experiment, in the second case they would. 7 This insight applies to any model where individuals optimize and the only source of inefficiency is distortionary taxation (Kleven and Kreiner, 2005). term on the RHS of (11). ...
Inspired by Hayek (1945), we study the distortionary effects of taxation on labor mobility and the long run allocation of labor across different profitable opportunities. These effects are not well detected by the methods applied in the large public finance literature estimating the elasticity of taxable income and quantifying the welfare loss from taxation. Our analysis builds on a standard search theoretic framework where workers are continually seeking better paid jobs, but are also fired from time to time because of economic development and productivity shocks. We incorporate non-linear taxation into this setting and estimate the structural parameters of the model using employer-employee register based data for the full Danish population of workers and workplaces for the years 2004-2006. Our results indicate that along the intensive margin the Danish taxation generates an overall efficiency loss corresponding to a 12 percent reduction in GDP. It is possible to reap 4/5 of this potential efficiency gain by going from a high-tax Scandinavian system to a level of taxation in line with low-tax OECD countries such as the United States. The tax-responsiveness of labor mobility and allocation corresponds to an elasticity of taxable income with respect to the net-of-tax rate in the range 0.15-0.3.
... To see this, recall that the size of MCF reflects behavioral revenue effects. In other words, behavioral responses matter only to the extent that they affect government revenue, an implication of the assumptions of rational individuals and efficient markets (e.g., Kleven and Kreiner, 2005). Since an increased amount of work in the untaxed underground economy does not generate revenue, it does not affect MCF. ...
This paper extends the theory and measurement of the marginal cost of public funds (MCF) to account for labor force participation responses. Our work is motivated by the emerging consensus in the empirical literature that extensive (participation) responses are more important than intensive (hours of work) responses. In the modelling of extensive responses, we argue that it is crucial to account for the presence of non-convexities created by fixed work costs. In a non-convex framework, tax and transfer reforms give rise to discrete participation responses generating first-order effects on government revenue. These revenue effects make the marginal cost of funds higher and we show numerically that the implications for MCF tend to be substantial.
Çalışmanın amacı, ekonomik ve kurumsal faktörlerin çalışma saatleri üzerindeki etkisinin analiz edilmesidir. Neo-klasik ekonomi modeli çerçevesinde birey zaman kullanımı konusunda karar vermek durumundadır. Buna göre birey; zamanının bir kısmını piyasada geçerli olan ücret düzeyinde çalışmak için, diğer bir kısmını da boş zaman olarak kullanmak amacıyla iki alternatif arasında paylaştıracaktır. Neo-klasik model, boş zamanı normal mal olarak kabul etmektedir. Normal mallar tüketicinin gelir düzeyi arttığında talebi artan mallar olduğu için, bireyin gelir düzeyindeki artışa bağlı olarak, boş zaman talebinde de artış olması beklenmektedir. Diğer taraftan, toplumsal değerleri ifade eden kurumsal faktörler de birey davranışları üzerinde etkili olarak boş zaman tercihlerini etkilemektedirler. Çalışmada, bu sürecin nasıl işlediği, işe alma- asgari ücret, işe alma-işten çıkarma ve toplu sözleşme gibi üç adet kurumsal yapı değişkenine ilave olarak, kişi başına düşen GSYİH ve marjinal vergi oranı ve transfer ve sübvansiyonlar olmak üzere üç adet ekonomik değişkenin kullanılmasıyla incelenmeye çalışılmıştır.Çalışmada öncelikle boş zaman kavramı açıklanmış, ardından Neo-klasik model çerçevesinde gelir değişmeleri ve boş zaman arasındaki etkileşime yer verilmiş, daha sonra da toplumun sahip olduğu kurumsal faktörler ve boş zaman arasındaki ilişkiler kurulmuştur. 2000-2015 dönemini kapsayan değişmelerin etkileri, Panel Veri Analizi yöntemi kullanılarak, 36 ülke için ekonometrik olarak test edilmiştir. Analiz sonuçlarına göre, “kişi başına düşen gelir”, “toplu sözleşme olanaklarının yüksekliği”, “transfer ve sübvansiyonlar” ve “marjinal vergi oranı” değişkenleri ile “haftalık çalışma saatleri” arasında istatistiksel olarak anlamlı ve negatif bir ilişki bulunurken; “işe alma asgari ücret değişkenleri” ile “haftalık çalışma saatleri” arasında istatistiksel olarak anlamlı ve pozitif bir ilişki ortaya çıkmıştır. “İşe alma ve işten çıkarma” değişkeni ise anlamsız sonuç vermiştir.
Should asset testing be used in means-tested programs? Focusing on Medicaid, we show that in the asymmetric information environment, there is a positive role for asset testing. Our tool is a general equilibrium model with heterogeneous agents. We find that 23% of Medicaid enrollees do not work in order to be eligible. These distortions are costly: If Medicaid eligibility could be linked to (unobservable) productivity, this results in substantial welfare gains. We show that asset testing can achieve a similar outcome when asset limits are allowed to be different for workers and nonworkers.
This paper illustrates how one can use causal effects of a policy change to measure its welfare impact without decomposing them into income and substitution effects. Often, a single causal effect suffices: the impact on government revenue. Because these responses vary with the policy in question, I term them policy elasticities to distinguish them from Hicks ian and Marshallian elasticities. The model also formally justifies a simple benefit- cost ratio to measure the marginal value of public funds corresponding to non- budget neutral policies. Using existing causal estimates, I apply the framework to five policy changes: top income tax rate, Earned Income Tax Credit (EITC) generosity, food stamps, job training, and housing vouchers. © 2016 by the National Bureau of Economic Research. All rights reserved.
This paper compare two alternative social politics to reduce poverty and income inequality in Brazil. The first one is a payment of a universal fixed income, called Basic Income Grant (BIG), and the second one is a Negative Income Tax (NIT), pay only to the families with low incomes. For analysis, we use a Computable General Equilibrium Model. The results had shown that the BIG is better that NIT when the costs of administration associated with the NIT is higher than 50%, and that for a cost between 0 and 50% the adopted program goes to depend on the strategy of poverty reduction.
In this lecture I consider the impact and optimality of Earned Income Tax Policies. The policy issue addressed is the low labour market attachment and high incidence of poverty among certain groups. These policies have taken a central position in EU labour market policy debate and I focus on reforms over the last decade in the UK.
This paper presents estimates of the employment and welfare effects of personal labour income taxation in Estonia. The labour supply decision of individuals is estimated based on data from the 2005 Estonian Labour Force Survey. Economic incentives are found to affect the participation decisions of individuals, but not the number of hours worked by individuals already working. The participation elasticities are higher for individuals in the middle income groups than for individuals in the low and high income groups. Increasing the proportional tax rate by 1 percentage point is found to reduce total employment by 0.35 percentage points. The baseline estimate of the marginal cost of public funds is 1.6 if the proportional tax rate is increased and 1.8 if the basic exemption is lowered. The marginal cost of public funds varies across different income groups, which may suggest possible gains in efficiency from reallocating the taxation burden of the existing system of proportional taxation. The employment and welfare estimates are subject to substantial
The literature suggests that the concern for economic efficiency calls for individual-based taxation of married couples with a higher rate on the primary earner. This paper reconsiders the choice of tax unit in the Becker model of household production. In the absence of restrictions on the use of commodity taxes, efficient taxation requires joint taxation of the family. In the presence of restricted commodity taxation, the income tax should compensate for the erroneous commodity taxes. In this case, individual taxation is typically optimal, but not necessarily with a higher rate on primary earners as usually suggested.
An emerging consensus is that labor force participation is more responsive to taxes and transfers than hours worked. To understand the implications of participation responses for the welfare analysis of tax reform, this paper embeds this margin of labor supply in an explicit welfare theoretic framework. We apply the framework to examine the welfare effects on single mothers in the United States following four tax acts passed in 1986, 1990, 1993, and 2001. We propose a simulation method combining features of fully structural microsimulation studies and simple deadweight loss calculations. Our approach accounts for the observed heterogeneity in the microdata, but is simple to implement because we do not need to specify utility functions and estimate utility parameters. We find that each of the four tax acts created substantial welfare gains, and that the gains were concentrated almost exclusively on the participation margin. Our results imply that standard approaches not modeling the participation decision can make large errors.
The labor supply and other work incentive effects of welfare programs have long been a central concern in economic research. Work has also been an increasing focus of policy reforms in the USA, culminating with a number of major policy changes in the 1990s whose intent was to increase employment and earnings levels of welfare recipients and other disadvantaged individuals. This chapter reviews the economic research on this topic, covering both the theoretical models that have been developed as well as the empirical findings from econometric studies of the effects of existing welfare programs on labor supply.
How do people go about choosing between alternatives in relatively simple settings? This study explores some of the variables that past work suggests may be relevant. Volunteer subjects worked for money in six procedures in which the probability of a payment from either of two alternatives was 1.0, but the rate of pay (i.e. the speed with which a payment was delivered or the size of the payment) interacted with the subjects recent allocation of choices, which we define as the ‘internalities’. Because of the internalities, choosing the currently more profitable alternative did not maximize total earnings. Subjects were more likely to fail to maximize when the interaction between present pay and past choices was spread over longer sequences of choices, or when the reward variable was the speed, rather than the value, of each payment. Subjects often disregarded the internalities and were instead guided by the current yields of the two alternatives, which is a frequently observed tendency, called ‘melioration’, in experiments on choices by animals. The tendency toward melioration was only partially counteracted by explicit instructions on how to maximize earnings. We discuss a theoretical framework for melioration that postulates both motivational and cognitive sources.
During 1984–1996, welfare and tax policy were changed to encourage work by single mothers. The Earned Income Tax Credit was
expanded, welfare benefits were cut, welfare time limits were added, and welfare cases were terminated. Medicaid for the working
poor was expanded, as were training programs and child care. During this same time period there were unprecedented increases
in the employment and hours of single mothers. We show that a large share of the increase in work by single mothers can be
attributed to the EITC and other tax changes, with smaller shares for welfare benefit cuts, welfare waivers, training programs
and child care programs.
The aim of the project was to build EUROMOD, a tax-benefit microsimulation model covering all 15 Member States of the European Union. This has been achieved, and baseline results are available for 14 countries. (Validated results for Sweden will appear shortly.) EUROMOD has been used for a number of policy-related exercises ranging from studies of the relationship of public spending on social benefits to poverty and the implications of a common European minimum pension, to the impact of welfare benefits on work incentives and the consequences of non-indexation of taxes and contributions. In addition, the model is ready to be used for a wide range of new applications. Not only can it be used to explore the impact of prospective (and hypothetical) changes in social and fiscal policy on poverty and inequality; it can also estimate the cost of reforms, provide options for financing mechanisms, and establish the effect of the reforms in other dimensions such as the work incentives of household members and any implied redistribution within the household. In many ways, EUROMOD is ahead it its time. When the project first started in 1998 (and when the idea was first conceived in 1996) the priorities set at the Lisbon European Council could not have been fully anticipated. It is now clear that the project was timely. EUROMOD is ready to play a role in analysing changes in social and fiscal policies proposed by Member States with reference to agreed benchmarks for the reduction of poverty and social exclusion. The project final report describes in some detail the process of model construction. It was a very complex project that was more demanding for all concerned than could have been anticipated. In some respects it was more akin to an engineering enterprise than a social science research project. In building EUROMOD, particular emphasis has been placed on: transparency of methods: it is therefore open to critiques of the approach as a whole, as well as criticism and suggestion on matters of detail; ??designing a model that is flexible and adaptable: to make the range of uses as wide as possible and to maximise the length of its useful life; ??consistency and comparability across countries: developing harmonisation of methods, assumptions and input and output concepts is a major part of building an integrated European model. Concretely, it involved: ??identifying common structural characteristics in national policies; ??identifying common data requirements; ??parameterising and generalising as many aspects of the model as possible, including the definitions of the income base and unit of assessment or entitlement for each tax and benefit, the effective equivalence scales inherent in social benefit payments, and the output income measure. This approach not only allows each system to be modelled in a manner that is comparable to existing national practice, it also provides the model user with a much greater range of choice and greater flexibility than ñ we believe ñ is available in any other existing tax benefit model. Before the project began, the degree of experience and expertise with tax-benefit modelling in Member States varied greatly. As is well known, the tax and transfer systems also vary widely in underlying philosophy, as well as in current structure and size. The national sources of microdata with which to build the model were not equally suited to the task. One of the projectÃs most significant achievements is its success in bringing tax-benefit modelling capacity in all Member States up to the level of best practice in the EU.
Increases in income tax progressivity generally entail some efficiency cost due to increased distortion of individuals' labor supply decisions. This paper quantifies the magnitude of the efficiency cost of several policies which would increase the progressivity of the U.S. individual income tax. The analysis differs from previous work on this topic in allowing for complex nonlinear tax schedules similar to those which actually exist. The efficiency cost of increased progressivity is found to vary considerably with the type of tax reform considered. Expanding the earned income tax credit (EITC) is found to be a particularly efficient means of increasing progressivity. Using the labor supply parameters I consider most reasonable, I find that the efficiency cost of expanding the EITC financed by increased tax rates in the intermediated brackets is less than 20 cents per dollar transferred from the upper income groups to the lower income groups.
In October 1999, the working families’ tax credit (WFTC) replaced family credit as the main package of in-work support for families with children. Among a range of stated aims, the WFTC is intended to ‘... improve work incentives, encouraging people without work to move into employment’. In this paper, we consider the impact of WFTC on hours and participation. To simulate labour supply responses, we use a discrete behavioural model of household labour supply with controls for fixed and childcare costs, and unobserved heterogeneity. In simulation, we experiment with a number of scenarios regarding the take-up of the credit, entry wage level and hourly childcare price. We find participation rates among single mothers to increase by around 2.2 percentage points for the base-case scenario, while for married women participation rates are modelled to fall. Our simulation results indicate a small increase in overall participation of around 30,000 individuals.
The efficiency effects of redistributive policies are analyzed using a computational general equilibrium model, based on U.S. data for 1979. For parameter values considered most reasonable, a tax-financed universal cash grant generates losses for the higher-income groups that exceed the gains of the lower-income groups by 50 to 130 percent. These efficiency costs are substantially below those calculated by other authors. The marginal efficiency cost of redistribution through wage subsidies is near zero and can be negative. Social preferences regarding inequality need not be anywhere near Rawlsian in order for society to prefer further redistribution. Copyright 1988 by American Economic Association.
This study undertakes a systematic analysis of several theoretic and statistical assumption s used in many empirical models of female labor supply. Using a singl e data set (PSID 1975 labor supply data) the author is able to replic ate most of the range of estimated income and substitution effects fo und in previous studies in this field. He undertakes extensive specif ication tests and finds that most of this range should be rejected du e to statistical and model misspecifications. The two most important assumptions appear to be the Tobit assumption used to control for sel f-selection into the labor force and exogeneity assumptions on the wi fe's wage rate and her labor market experience. Copyright 1987 by The Econometric Society.
We analyse recent proposals to shift the tax burden away from low-paid labour, assuming a dual labour market where the “good” high-paying jobs are rationed. A shift in the tax burden from low-paid to high-paid workers has an ambiguous effect on the level of aggregate employment while the allocation of aggregate employment is further distorted. Even if the tax reform raises total employment, economic efficiency may be reduced because labour is reallocated from high-productive to low-productive jobs. We also find that opportunities for on-the-job search have important implications for the policy effects.
The labor market consists of two tiers. Workers in the upper tier enjoy high wages, good benefits, and employment security, and they are often unionized. Workers in the lower tier experience low wages, high turnover, job insecurity, and little chance of promotion. Until now, dual labor market theory has focused mainly on microeconomic factors such as discrimination, poverty, and public welfare. Dual Labor Markets considers the macroeconomic implications of the dual market. The book uses theoretical models derived from the author's research over the past six years to analyze such policy issues as the level and persistence of unemployment, the level of real wages, the accumulation of human capital, and the political viability of labor market reform in the United States and Europe.
From book description:
Modern labor economics has continued to grow and develop since the first volumes of this Handbook were published. The subject matter of labor economics continues to have at its core an attempt to systematically find empirical analyses that are consistent with a systematic and parsimonious theoretical understanding of the diverse phenomenon that make up the labor market. As before, many of these analyses are provocative and controversial because they are so directly relevant to both public policy and private decision making. In many ways the modern development in the field of labor economics continues to set the standards for the best work in applied economics. This volume of the Handbook has a notable representation of authors - and topics of importance - from throughout the world.
A distinguishing feature of recent changes to the US system of public assistance is its increasing focus on working families and reliance on the tax system to transfer dollars to needy families. After a decade in near total obscurity, the earned income tax credit (EITC) was expanded to become the largest cash-transfer program for lower-income families with children. Advocates of the EITC argue that, unlike traditional welfare, the credit helps “promote both the values of family and work”. Indeed, empirical evidence consistent with economic theory suggests that the EITC promotes employment among eligible unmarried women with children. To target benefits to lower-income families, however, the EITC is based on family income, leading to traditional welfare-type disincentives for most eligible secondary earners. In fact, the EITC is likely to reduce overall family labor supply among married couples.This paper examines the labor force participation response of married couples to EITC expansions between 1984 and 1996. The effect of the credit is estimated using both quasi-experimental and traditional reduced-form labor supply models. Results from both models show the same qualitative conclusion, that the EITC expansions reduced total family labor supply of married couples. In all cases, we find a decline in labor force participation by married women that more than offsets any rise in participation by their spouses. While the labor force participation rate of married men increased by about 0.2 percentage points, that of married women decreased by just over a full percentage point. These aggregate effects mask substantial heterogeneity in the population. Women facing the strongest disincentives were more than 2 percentage points less likely to work after the expansions. These findings imply that the EITC is effectively subsidizing married mothers to stay home, and therefore, have implications for the design of the program.
The effect of income taxation on the labor supply of prime age married men and women in the United States is examined using econometric methods similar to those used in the influential work of Jerry Hausman. Male labor supply is found to be relatively invariant to the net wage and virtual income in all specifications estimated. The estimated impact of taxation on the labor supply of married women depends critically on the method used to estimate the labor supply function. Estimated net wage and virtual income elasticities are considerably larger when data on nonparticipants are included than when the estimation is conducted conditional on hours being greater than zero.
This paper argues that recent empirical evidence on labor supply behavior— showing stronger participation than hours-of-work responses— has important implications for the evaluation of tax reforms. We outline a simple welfare theoretic framework incorporating (discrete) participation responses, and show that in the presence of nonlinearities in the tax- transfer system, it is necessary to distinguish explicitly between intensive (hours worked) and extensive (participation) behavioral responses for welfare analysis. This is because welfare effects from participation depends on a different tax wedge than welfare effects from hours worked. To examine the quantitative importance of the theoretical results, we evaluate the welfare effects of a large tax reform in the United States, the Tax Reform Act of 1986, on female household heads. The simulations show that TRA86 created substantial welfare gains, concentrated largely along the extensive margin of labor supply. Our results indicate that policy simulations which do not account for (discrete) participation responses may make significant errors.
This paper uses a 1976 microdata base to estimate the marginal cost of reducing income inequality with a policy that has distributional effects similar to the present tax-transfer system. The analysis uses a simulation methodology in which only the labor supply effects are evaluated; other behavioral effects are ignored. The most striking finding is that marginal cost is quite high even for modest labor supply elasticities. For example, in the benchmark case with a weighted-average economy-wide uncompensated wage elasticity of 0.2 (and compensated elasticity of 0.31), the disposable money income of upper-income quintiles of households is depressed by 9.51 for each dollar increase in the disposable money income of lower-income quintiles. When income equivalent values that take account of the value of leisure are compared, the marginal cost for this case is estimated to be 3.49.
This paper uses a Treasury Department panel of more than 4,000 taxpayers to estimate the sensitivity of taxable income to changes in tax rates based on a comparison of the tax returns of the same individual taxpayers before and after the 1986 tax reform. The analysis emphasizes that the response of taxable income involves much more than a change in the traditional measures of labor supply. The evidence shows an elasticity of taxable income with respect to the marginal net-of-tax rate that is at least one and that could be substantially higher. The implications for recent tax rate changes are discussed. Copyright 1995 by University of Chicago Press.
This paper develops a model of dual labor markets based on employers' need to motivate workers. In order to elicit effort from their workers, employers may find it optimal to pay more than the going wage. This changes fundamentally the character of labor markets. The model is applied to a wide range of labor market phenomena. It provides a coherent framework for understanding the claims of industrial policy advocates. It also can provide the basis for a theory of occupational segregation and discrimination that will not be eroded by market forces. Finally, the model provides the basis for a theory of involuntary unemployment. Copyright 1986 by University of Chicago Press.
This paper analyzes optimal income transfers for low incomes. Labor supply responses are modeled along the intensive margin
(intensity of work on the job) and along the extensive margin (participation into the labor force). When behavioral responses
are concentrated along the intensive margin, the optimal transfer program is a classical Negative Income Tax program with
a substantial guaranteed income support and a large phasing-out tax rate. However, when behavioral responses are concentrated
along the extensive margin, the optimal transfer program is similar to the Earned Income Tax Credit with negative marginal
tax rates at low income levels and a small guaranteed income. Carefully calibrated numerical simulations are provided.
This paper examines the impact of the Tax Reform Act of 1986 (TRA86), which included an expansion of the earned income tax
credit, on the labor force participation and hours of work of single women with children. We identify the impact of TRA86
by comparing the change in labor supply of single women with children to the change for single women without children. We
find that between 1984–1986 and 1988–1990, single women with children increased their relative labor force participation by
up to 2.8 percentage points. We observe no change in the relative hours worked by single women with children who were already
in the labor force.
This working paper considers how hours of work and labour force participation are likely to respond to tax reforms. As regards hours of work, the analysis looks at married women and lone parents. Married women constitute a group which responds to incentives, as shown by experimental and sample survey studies. Lone parents, an important fraction of the working age population in some countries, often are subject to special tax and income support provisions and have limited sources of alternative income. A second part of the analysis concerns inflows to and outflows from employment, labour force participation and duration of unemployment as they affect men and women in different age groups and with differing family responsibilities.
The analysis is based mainly on the well-documented tax reforms in the United Kingdom. The first part of the paper develops the appropriate methodology for analysing labour supply responses to tax changes and the second part attempts to clarify the magnitude ...
L’impact des impôts sur l’activité et l’offre de travail
Ce document de travail étudie les effets possibles de la reforme de la fiscalité sur le temps du travail et les taux de participation. En ce qui concerne le temps du travail, l’analyse porte sur les femmes mariées et les parents isolés. Les femmes mariées constitue un groupe dont le comportement est influencé par des incitations ainsi que les études d’expériences et d’échantillonnage l’ont démontré. Dans certains pays les parents isolés forme une fraction importante de la population en age actif et bénéficient souvent de dispositions spéciales d’imposition et de soutien des revenus tout en n’ayant que peu de sources alternatives de revenus. Une deuxième partie de l’analyse considère les entrées et sorties de l’emploi, de la population active ainsi que la durée du chômage pour les hommes et femmes dans différents groupes d’age et de situation familiale.
L’étude est fondée sur les réformes de la fiscalité au Royame Uni bien documentées. La première partie du document développe le cadre ...
This paper uses the Tax Reform Act of 1986 as a natural experiment to identify the labor supply responsiveness of married women to changes in the tax rate. The Tax Reform Act of 1986 reduced the top marginal tax rate by 44 percent (from 50 percent to 28 percent), but changed less the marginal tax rate for those further down the income distribution. I analyze the response of married women at or above the 99th percentile of the income distribution, using as a control group women from the 75th percentile of the income distribution. I therefore identify the tax effect as the difference between the change in labor supply of women with large tax rate reductions and the change in labor supply of women with small tax rate reductions. I find evidence that the labor supply of high-income, married women increased due to the Tax Reform Act of 1986. The increase in total labor supply of married women at the top of the income distribution (relative to married women at the 75th percentile of the income distribution) implies an elasticity with respect to the after- tax wage of approximately 0.8. At least half of this elasticity is due to labor force participation. Use of a second control group supports the participation response but is inconclusive on the hours of work response.
This paper use income tax return data from 1960 to 2000 to analyze the link between reported incomes and marginal tax rates. Only the top 1% incomes show evidence of behavioral responses to taxation. The data displays striking heterogeneity in the size of responses to tax changes overtime, with no response either short-term or long-term for the very large Kennedy top rate cuts in the early1960s, and striking evidence of responses, at least in the short-term, to the tax changes since the 1980s. The 1980s tax cuts generated a surge in business income reported by high income individual taxpayers due to a shift away from the corporate sector, and the disappearance of business losses for tax avoidance. The Tax Reform Act of 1986 and the recent 1993 tax increase generated large short-term responses of wages and salaries reported by top income earners, most likely due to re-timing in compensation to take advantage of the tax changes. However, it is unlikely that the extraordinary trend upward of the shares of total wages accruing to top wage income earners, which started in the 1970s and accelerated in the 1980s and especially the late 1990s, can be explained solely by the evolution of marginal tax rates.
All modern labour market theories capable of explaining involuntary unemployment as an equilibrium phenomenon imply that increased income tax progressivity reduces unemployment, but they also imply that higher progressivity tends to reduce work effort and labour productivity. This suggests that there may be an optimal degree of tax progressivity where the marginal welfare gain from reduced involuntary unemployment is just offset by the marginal welfare loss from lower productivity. This paper sets up three different simulation models of an imperfect labour market in order to identify the degree of tax progressivity which would maximise the welfare of the representative wage earner. The simulations suggest that the optimal degree of tax progressivity could be substantial and that the welfare gains from tax progressivity could be quite large, although the results are sensitive to the generosity of unemployment benefits and to the after-tax wage elasticity of work effort.
This paper develops a rigorous partial equilibrium analysis of the determinants of margin al welfare cost (MWC) of taxes on labor earnings. It shows that four key parameters interact to determine the magnitude of MWC. Using aggregate data and plausible ranges of values for the parameters, MWC can vary from under 10 percent to more than 300 percent of marginal tax revenue. Intermediate parameter values sugge st MWC is in the 25-50 percent range. However, the more extreme estimates cannot be ruled out on the basis of available evidence, suggesting that MWC cannot yet be Copyright 1987 by American Economic Association.
This Paper estimates the welfare and distributional impact of two types of welfare reform in 14 member countries of the European Union. The reforms are revenue neutral and financed by an overall and uniform increase in marginal tax rates on earnings. The first reform distributes the additional tax revenue uniformly to everybody (traditional welfare) while the second reform distributes tax proceeds uniformly to workers only (in-work benefit). We build a simple model of labour supply encompassing responses to taxes and transfers along both the intensive and extensive margin. We then use EUROMOD to describe current welfare and tax systems in all European Union countries (except Sweden) and use calibrated labour supply elasticities along the intensive and extensive margins to analyse the effects of the two welfare reforms. We quantify the equity-efficiency trade-off for a range of elasticity parameters. In most countries, because of the large existing welfare programs with high phase-out rates, the uniform redistribution policy is, in general, undesirable unless the redistributive tastes of the government are extreme. The in-work benefit reform, on the other hand, is desirable in a very wide set of cases. We discuss the practical policy implications for European welfare policy.
Corruption in the public sector erodes tax compliance and leads to higher tax evasion. Moreover, corrupt public officials abuse their public power to extort bribes from the private agents. In both types of interaction with the public sector, the private agents are bound to face uncertainty with respect to their disposable incomes. To analyse effects of this uncertainty, a stochastic dynamic growth model with the public sector is examined. It is shown that deterministic excessive red tape and corruption deteriorate the growth potential through income redistribution and public sector inefficiencies. Most importantly, it is demonstrated that the increase in corruption via higher uncertainty exerts adverse effects on capital accumulation, thus leading to lower growth rates.
Although the standard neoclassical model of female labour supply behaviour usually allows for the impact of demographic changes on value of female time in the household, the complexities of the tax and benefit system, and the influence of saving and borrowing on current period decisions, it does not allow for the possibility of involuntary unemployment. Women who are not working, that is, those who supply zero hours of labour, are assumed to do so voluntarily; the model does not allow for women who are not currently in employment and wanting to work but unable to obtain employment. This paper is an attempt to gauge how much the conclusions derived from the standard analysis of labour supply may have to be altered when we allow for such 'unemployed' workers. For the sample of married women in the UK which we investigate, the standard model appears to exaggerate the positive impact which reductions in marginal wages may have on participation and reduces the possibilities for a backward-bending supply curve of labour. The probability of being in a state of unemployment, as defined above, is found to depend on certain demand-side factors, age and a number of other demographic characteristics.
Danske resultater om sammenhaengen mellem marginalskat og løn
- C T Hansen
- L H Pedersen
- T Sløk
Hansen, C.T., L.H. Pedersen, and T. Sløk. (1996). " Danske resultater om sammenhaengen mellem marginalskat og løn. " Nationaløkonomisk Tidsskrift 134, 153-174.
- A B Krueger
- B D Meyer Alan
Krueger, A.B. and B.D. Meyer (2002). " Labor Supply Effects of Social Insurance, " in Alan