Working Paper: NBER ID: w10139
Authors: Don Fullerton; Li Gan
Abstract: Graduated income tax rates and transfer programs create piecewise-linear budget constraints that consist of budget segments and kink points. With any change in these tax rules, each individual may switch between a kink point and a budget segment, between two budget segments, or between two kink points. With errors in the estimated labor supply equation, the new choice is uncertain, and so the welfare effects of a tax change are uncertain. We propose a simulation-based method to compute expected welfare effects that is easy to implement and that fully accounts for uncertainties about choices around kink points. Our method also provides information about expected changes in working hours.
Keywords: No keywords provided
JEL Codes: H2; J2; D6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Changes in graduated income tax rates and transfer programs (H29) | Piecewise-linear budget constraints (D10) |
| Piecewise-linear budget constraints (D10) | Uncertain welfare effects for individuals (D69) |
| Uncertain welfare effects for individuals (D69) | Changes in working hours and welfare loss (J38) |
| Labor supply elasticity estimates near zero (J20) | Expected welfare effects can still be substantial (D69) |
| Stochastic evaluation of welfare loss (D69) | Welfare loss from labor taxes is significantly larger (H31) |
| Stochastic elements in welfare loss calculations (D69) | Larger estimates of welfare effects (D69) |