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.
Document Type
Working Paper
Date
11-2004
Keywords
Life Cycle, Labor Supply, Consumption, Taxation, Marginal Welfare Cost
Series
Working Papers Series
Disciplines
Economics | Labor Economics | Public Affairs, Public Policy and Public Administration
Recommended Citation
Ziliak, James P. and Kniesner, Thomas J., "The Effect of Income Taxation on Consumption and Labor Supply" (2004). Center for Policy Research. 179.
https://surface.syr.edu/cpr/179
Source
local input
Creative Commons License
This work is licensed under a Creative Commons Attribution 3.0 License.
Included in
Labor Economics Commons, Public Affairs, Public Policy and Public Administration Commons
Additional Information
Working paper no. 54