nep-pub New Economics Papers
on Public Finance
Issue of 2010‒07‒24
three papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Labor Supply and Taxes: A Survey By Michael Keane
  2. Does Income Taxation Affect Partners' Household Chores? By van Soest, Arthur; Stancanelli, Elena
  3. Do High Tax and Tax Evasion go Hand in Hand? The Non-Linear Case By Alain Trannoy; Gwenola Trotin

  1. By: Michael Keane (School of Finance and Economics, University of Technology, Sydney)
    Abstract: I survey the male and female labor supply literatures, focusing on implications for effects of wages and taxes. For males, I describe and contrast results from three basic types of model: static models (especially those that account for nonlinear taxes), life-cycle models with savings, and life-cycle models with both savings and human capital. For women, more important distinctions are whether models include fixed costs of work, and whether they treat demographics like fertility and marriage (and human capital) as exogenous or endogenous. The literature is characterized by considerable controversy over the responsiveness of labor supply to changes in wages and taxes. At least for males, it is fair to say that most economists believe labor supply elasticities are small. But a sizeable minority of studies that I examine obtain large values. Hence, there is no clear consensus on this point. In fact, a simple average of Hicks elasticities across all the studies I examine is 0.30. Several simulation studies have shown that such a value is large enough to generate large welfare costs of income taxation. For males, I conclude that two factors drive many of the differences in results across studies. One factor is use of direct vs. ratio wage measures, with studies that use the former tending to find larger elasticties. Another factor is the failure of most studies to account for human capital returns to work experience. I argue that this may lead to downward bias in elasticity estimates. In a model that includes human capital, I show how even modest elasticities – as conventionally measured – can be consistent with large welfare costs of taxation. For women, in contrast, it is fair to say that most studies find large labor supply elasticities, especially on the participation margin. In particular, I find that estimates of “long run†labor supply elasticities – by which I mean estimates that allow for dynamic effects of wages on fertility, marriage, education and work experience – are generally quite large.
    Date: 2010–07–01
  2. By: van Soest, Arthur (Tilburg University); Stancanelli, Elena (University of Cergy-Pontoise)
    Abstract: We study the impact of income taxation on both partners' allocation of time to market work and unpaid house work in households with two adults. We estimate a structural household utility model in which the marginal utilities of leisure and house work of both partners are modelled as random coefficients, depending on observed and unobserved characteristics of the household and the two partners. We use a discrete choice model with choice sets of 2,401 points for each couple, distinguishing seven market work intervals and seven house work intervals for each partner. The model is estimated using data for France, which taxes incomes of married couples jointly, like, for instance, Germany and the US. We find that both partners’ market and non-market time allocation decisions are responsive to changes in the tax system or other policy changes that change the financial incentives. Women's time allocation is more responsive to the own and the partner’s wage rate than men's. Tax policy simulations suggest that moving from joint taxation for married couples to separate taxation of each spouse would go a small step in the direction of equalizing market and non-market work of spouses. Selective taxation with smaller tax rates for women than for men would magnify these effects.
    Keywords: time use, taxation, labour supply, discrete choice models
    JEL: J22 H31 C35
    Date: 2010–06
  3. By: Alain Trannoy (EHESS, Greqam-Idep); Gwenola Trotin (EQUIPPE, Université Charles-de-Gaulle Lille 3)
    Abstract: This paper fully investigates how a tax rate change can affect tax evasion, under the expected utility theory hypothesis. We generalize the Allingham-Sandmo benchmark model of tax evasion, using very general non-linear specifications for the tax schedule and the fine scheme. We consider both interior and corner solutions in terms of tax evasion. When the fine is imposed on the evaded tax, we examine the robustness of Yitzhaki’s result of a positive relationship between a change in tax rate and undeclared income. When the fine is imposed on the undeclared income, we obtain conditions under which Allingham and Sandmo’s result of a inverse relationship remains valid, and particularly with DARA. The case of an endogenous audit probability is also considered.
    Keywords: Tax evasion; Non-linearity; Expected utility theory
    JEL: D81 H26 K42
    Date: 2010–07

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