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(共34张PPT)
21
21.1 Taxation and Labor Supply—Theory
21.2 Taxation and Labor Supply—Evidence
21.3 Tax Policy to Promote Labor Supply: The Earned Income Tax Credit
21.4 The Tax Treatment of Child Care and Its Impact on Labor Supply
21.5 Conclusion
Taxes on Labor Supply
21
Introduction
Between 1987 and 1988, Iceland overhauled its tax system.
During the transition to this new system, workers paid taxes on their 1986 income in 1987, and paid taxes on their 1988 income in 1988. Their 1987 income thus was never taxed!
Did this radical change in the tax burden actually affect workers’ decisions about how many hours to work
Bianchi, Gudmundsson, and Zoega et al (2001) investigated this issue by examining the response of Icelandic workers to this one-year “tax holiday,” and they found large effects on labor supply and economic growth.
21
Iceland’s Tax Overhaul
Overall employment spiked in 1987 from 78% to 85%.
21
Introduction
On average, each 1% rise in after-tax wages led workers to work 0.4% more weeks than they had previously.
Real GDP also leapt from an annual growth rate of 4.3% to 8.5%.
The effects were, however, transitory. By 1988, these figures had dropped back to levels comparable to the pre-tax-reform levels.
This striking response to a change in tax policy shows that taxes can have effects on important decisions, such as how much to work.
21.1
The theoretical framework for assessing how income taxes affect labor supply is the same as that used to model the effect of cash welfare on labor supply.
Ava trades off consumption (which requires work) against leisure.
Each hour of leisure costs Ava her wage, $12.50, in foregone consumption, so the slope of her budget constraint is 12.5.
A 30% tax rate alters this trade-off. The slope of Ava’s budget constraint is now the after-tax wage, 8.75.
Basic Theory
Consumption
Leisure hours
0
Indifference curve, IC1
A
BC1
BC2
900
C1 = $13,750
C2 = $9,625
slope = 12.50
slope = 8.75
Basic Theory
21.1
Before taxes are introduced, Ava loses $12.50 worth of consumption for each hour of leisure she takes. After tax τ = 0.3 is imposed, Ava’s after-tax wage is 12.50 × (1 – 0.3) = 8.75. Because some of Ava’s wages go to pay taxes, Ava now gets less consumption (C2 = 9,625) for the same amount of work/leisure.
21.1
Taxes have two effects:
The fall in the price of leisure induces a substitution effect toward less work.
The fall in income has an income effect, so Ava buys less of all normal goods, including leisure.
Effects are opposite-signed, so the theoretical impact of taxation on labor supply is ambiguous.
Substitution and Income Effects on Labor Supply
Consumption
Leisure hours
0
(a) Substitution effect is larger
BC
7,000
1,200
(b) Income effect is larger
BC2
$13,750
900
A
B
IC1
IC2
Consumption
Leisure hours
0
BC1
12,250
900
BC2
600
A
IC1
$13,750
C
IC3
Substitution Versus Income Effect
21.1
A tax shifts the budget constraint inward from BC1 to BC2. If the substitution effect of the change in the after-tax wage is larger, work is less attractive, and Ava chooses to have more leisure. If the income effect is larger, Ava feels poorer and thus reduces her leisure (increases her work hours) in order to regain some of that lost income.
21.1
Theory assumes free adjustment of hours worked.
Firms may want all workers to work the same hours, perhaps because of production complementarities.
Overtime pay rules also make it difficult to adjust hours at a constant wage.
Overtime pay rules: Workers in many jobs must legally be paid one and a half times their regular hourly pay if they work more than 40 hours per week.
Limitations of the Theory: Constraints on Hours Worked and Overtime Pay Rules
21.2
Separately examine primary and secondary earners.
Primary earners: Family members who are the main source of labor income for a household.
Secondary earners: Workers in the family other than the primary earners.
General conclusions:
Labor supply response to changes in income were positive; greater income means more labor supplied, not less.
Primary earners’ labor supply elasticity
Secondary earners’ elasticity .
Taxation and Labor Supply—Evidence
21.2
Cross-Sectional Linear Regression Evidence:
These studies estimate regressions of labor supply as a function of the after-tax wage and other control variables.
Generally, find very elastic labor supply.
But many sources of bias, especially from a correlation between “work propensity” and wages.
EVIDENCE: Estimating the Elasticity of Labor Supply
21.2
Experimental Evidence:
One of the most significant social experiments in the United States was a randomized evaluation of a negative income tax (NIT) system.
Replaced tax system with a guarantee amount and a (flat) phase-out rate.
Focused on men, finding an elasticity of labor supply for primary earners of about 0.1.
EVIDENCE: Estimating the Elasticity of Labor Supply: Cross-Sectional Linear Regression
Quasi-Experimental Evidence:
Looks at how labor supply changes as tax policy changes.
Eissa (1995) studied Tax Reform Act of 1986 (TRA 86).
TRA 86 reduced marginal tax rates for very high earners but not middle or low earners.
Eissa compared wives of very high earners to wives of moderately high-income men (75th percentile).
Estimated secondary earners’ elasticity of about 0.8.
EVIDENCE: Estimating the Elasticity of Labor Supply
21.2
Evidence from “Bunching” Around Jumps in the Tax Schedule:
The newest approach focuses on a particular feature of tax schedules: a jump in a tax schedule that implies very large marginal tax rates on additional earnings.
Chetty et al. (2011) studied the case of Denmark, which had a very large jump around its top income tax bracket.
Finds there is a “bunching” right before the increase to the top tax bracket.
EVIDENCE: Estimating the Elasticity of Labor Supply
21.2
The number of wage-earning taxpayers with taxable incomes steadily decreases as incomes grow larger. However, there is a break in the trend between those earning 262,000 Danish kroner (DKr) and those earning 267,000 DKr, the income at which the tax rate increases, with a sizeable “bunching” of taxpayers right before that cutoff.
EVIDENCE: Estimating the Elasticity of Labor Supply
21.2
The number of self-employed taxpayers filing with high incomes is relatively low compared to wage earners, but they show far more responsiveness to the tax rate increase.
EVIDENCE: Estimating the Elasticity of Labor Supply
21.2
21.2
Blurring line between primary and secondary earners:
In 1970, 31.9% of married women were working, but almost 59% were in 2013.
Hours worked is a narrow measure of labor supply response. It misses:
Effort on the job.
Occupation or career choice.
Human capital investment.
Limitations of Existing Studies
21.3
Earned Income Tax Credit (EITC): A federal income tax policy that subsidizes the wages of low-income earners.
The EITC has two goals:
Redistribution of resources to lower-income groups.
Increases in the amount of labor supplied by these groups.
EITC spending totaled nearly $58 billion in 2015 and has increased dramatically over the last two decades.
Tax Policy to Promote Labor Supply: The Earned Income Tax Credit
Background on the EITC
21.3
The EITC program has grown from less than $1 billion in 1976 to nearly $58 billion today. Numbers are measured in current dollars.
21.3
The EITC is a refundable tax credit; the exact amount depends on earnings.
Eligibility depends on the number of children:
For families with more than two children, maximum earnings are $52,427.
With two children, the maximum is $49,186.
With one child, the maximum is $43,941.
With no children, the maximum is $20,020.
Background on the EITC
21.3
The EITC Benefit Structure
For the first $13,870 of earned income, Stacey receives an EITC payment of 40 per dollar of earnings, to a maximum of $5,548. Between $13,870 and $18,110 of earnings, the EITC payment is flat at $5,548. From $18,110 to $44,454 of earnings, the EITC payment falls by about 21 per dollar earned, until it reaches zero.
21.3
The impact of the EITC on four distinct groups:
For people not in the labor force at all, the EITC will likely raise their labor supply.
The effect on people already in the labor force who earn less than $13,870 is ambiguous.
It will lower the labor supply for people already in the labor force and earning between $13,870 and $18,110.
Labor supply definitely falls for people already in the labor force earning between $18,110 and $44,454.
Impact of EITC on Labor Supply: Theory
21.3
Impact of EITC on Labor Supply: Theory
The theory’s prediction about the net impact of the EITC on the total labor supply of low-income populations is ambiguous.
21.3
Changes on the structure of the EITC due to the Tax Reform Act of 1986 allowed economists to test the effects of the EITC by comparing those who were affected by these changes to those who were not.
The changes included:
raised the subsidy rate.
increased the maximum rate.
reduced the phase-out rate.
Impact of EITC on Labor Supply: Evidence
21.3
Impact of EITC on Labor Supply: Evidence
The Tax Reform Act of 1986 changed the structure of the EITC, so that a wider range of earnings was eligible for the subsidy.
21.3
Effects on Labor Force Participation: The EITC has increased the LFP of single mothers.
Effects on Hours of Work: No effect, conditional on working.
Impact on Married Couples: Married men’s labor supply appears not to respond to the EITC.
Summary: EITC supports redistribution without reducing labor supply.
Impact of EITC on Labor Supply: Evidence
21.3
Eissa and Leibman (1996) studied the impact of the 1986 EITC expansion.
Compared single women with children (the treatment group) to single women without children (controls).
The EITC expansion increased labor supply by 1.4 to 3.7 percentage points.
EVIDENCE: The Effect of the EITC on Single-Mother Labor Supply
21.3
The EITC, though successful, has some flaws:
Very small benefit for childless workers.
No credit increase for children beyond the second.
Marriage penalty, as it is based on family income.
The EITC is very complex; about 1/7 of eligible people do not participate, and the majority of EITC recipients hire professionals to help prepare their taxes.
APPLICATION: EITC Reform
21.4
Child care: Care provided for children by someone other than the parents of those children.
Child care expenditures in the United States: at least $80 billion.
Child care expenditures are effectively a tax on parent’s labor supply, so they reduce labor supply, and child care subsidies can increase labor supply.
The Tax Treatment of Child Care and Its Impact on Labor Supply
21.4
Child care creates a tax wedge because home work is not taxed, but formal sector work is.
Broadest definition of tax wedges: Any difference between pre- and post-tax returns to an activity caused by taxes.
Solutions: Tax home work by imputing earnings, make child care tax-deductible.
Imputing home earnings: Assigning a dollar value to the earnings from work at home.
The Tax Treatment of Child Care
21.4
The Tax Treatment of Child Care
Base Impute Earnings Deduct Child Care
Pre-tax/child care earnings 1,000 1,000 1,000
Child care costs 600 600 600
Child care deduction 0 0 600
Imputed earnings 0 600 0
Taxes if work 500 500 200
Taxes if home 0 300 0
After-tax value of work 500 500 800
After-tax value of home 600 300 600
The taxation of market work but not home work has created a tax wedge that puts market work at a disadvantage. There are two ways that policy makers could level the playing field in favor of market work: tax at-home work or deduct child care expenses.
21.4
Imputing income and deducting expenses are not equal: The deduction for child care costs lowers the tax base.
Three choices, all of which have drawbacks:
The status quo lowers social efficiency by deterring mothers from market work.
Taxing home work makes the most economic sense but is an administrative nightmare.
Offering subsidies to market work reduces the overall efficiency of the tax system.
Comparing the Options
21.4
Can’t correlate LFP with child care costs because lost wages are the majority of child care costs.
(Quasi-)experimental approaches:
Berger and Black (1992): Randomly assigned child care subsidies for some welfare recipients.
Gelbach (2002): Kindergarten birthday cutoffs.
Baker, Gruber and Milligan (2005): Examine Quebec subsidy for child care.
Clear but moderate elasticities: –0.1 to –0.35.
EVIDENCE: The Effect of Child Care Costs on Maternal Labor Supply
21.5
Optimal tax trades off:
The benefits of redistribution.
The efficiency cost of taxation, which depends on how peoples’ labor supply responds to taxes.
Primary earners are not very responsive, secondary earners are.
The EITC is a successful redistribution program designed to encourage labor supply.
Child care costs are an impendent to the labor supply of secondary earners.
Conclusion

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