| By: |
Meghir, Costas (University College London);
Phillips, David (Institute for Fiscal Studies, London) |
| Abstract: |
In this paper we provide an overview of the literature relating labour supply
to taxes and welfare benefits with a focus on presenting the empirical
consensus. We begin with a basic continuous hours model, where individuals
have completely free choice over their hours of work. We then consider fixed
costs of work, the complications introduced by the benefits system, dynamic
aspects of labour supply and we place the analysis in the context of the
family. The key conclusion of this work is that in order to estimate the
impact of tax reform and be able to generalise results, a structural approach
that takes account of many of these issues is desirable. We then discuss the
“new Tax Responsiveness” literature which uses the response of taxable income
to the marginal tax rate as a summary statistic of the behavioural response to
taxation. Underlying this approach is the unsatisfactory nature of using hours
as a proxy for labour effort for those with high levels of autonomy on the job
and who already work long hours, such as the self employed or senior
executives. After discussing relevant theory we then provide a summary of
empirical estimates and the methodology underlying the studies. Our conclusion
is that hours of work are relatively inelastic for men, but are a little more
responsive for married women and lone mothers. On the other hand,
participation is quite sensitive to taxation and benefits for women. Within
this paper we present new estimates form a discrete participation model for
both married and single men based on the numerous reforms over the past two
decades in the UK. We find that the participation of low education men is
somewhat more responsive to incentives than previously thought. For men with
high levels of education, participation is virtually unresponsive; here the
literature on taxable income suggests that there may be significant welfare
costs of taxation, although much of this seems to be a result of shifting
income and consumption to non-taxable forms as opposed to actual reductions in
work effort. |
| Keywords: |
labour supply, income taxation, welfare benefits, tax credits, incentive effects |
| JEL: |
J22 H24 H31 |
| Date: |
2008–03 |
| URL: |
http://d.repec.org/n?u=RePEc:iza:izadps:dp3405&r=pub |