Document Type

Working Paper

Date

11-2004

Embargo Period

10-3-2012

Keywords

Life Cycle, Labor Supply, Consumption, Taxation, Marginal Welfare Cost

Disciplines

Economics | Labor Economics | Public Affairs, Public Policy and Public Administration

Description/Abstract

We estimate the incentive effects of income taxation in a life-cycle model of consumption and labor supply that relaxes the standard assumption of strong separability within periods. Our model permits identification of both within-period preference parameters and lifecycle preference parameters such as the inter-temporal substitution elasticity. Results indicate that consumption and hours worked are direct complements in utility, and both increase with an increase in the after-tax share and with a compensated increase in the net wage. The compensated net wage elasticity is about 0.3, nearly double the standard estimates for men in the United States that ignore within-period non-separability between consumption and hours and rely on linear preferences. Given our estimated inter-temporal elasticity of substitution of about 0.96, the Frisch specific substitution elasticities of consumption and labor supply with respect to the after-tax wage are about 0.1 and 0.5, indicating significant inter-temporal smoothing of utility. Depending on consumption measure, static estimates of the marginal welfare cost of revenue-neutral taxation are 6–20 percent, which is about half the estimated welfare cost when additivity between consumption and leisure is incorrectly imposed.

Source

local input

Creative Commons License


This work is licensed under a Creative Commons Attribution 3.0 License.