Working Paper: NBER ID: w1102
Authors: Jerry A. Hausman
Abstract: Over 75% of Federal tax revenue is raised through the income tax and FICA taxes. The potential effects on labor supply and economic welfare are important because of the large and increasing reliance on direct taxation. Over the past few years significant legislative changes have occurred with respect to taxation of labor: the 25% tax cuts,indexation,the tax credit for working spouses, and likely increases in FICA taxation.I reviewr ecent econometric work which measures the effect of taxes on labor supply and which analyzes the likely effects of tax law changes on labor supply and economic welfare.Sections 1 and 2 develop the theory and econometric techniques for models of labor supply with taxes. Section 3 discusses the various tax systemsin the U.S. In Section 4, I present empirical estimates for husbands'and wives' labor supply functions. The economic cost of the tax system is also estimated. In Section 5 the individual questionnaire data for high income individuals is reviewed. Lastly, in Section 6 evidence from the negative income tax experiments and for social security beneficiaries is considered. These latter groups face extremely high marginal tax rates so that evidence beyond that contained in other surveys of labor supplyis provided.
Keywords: Taxes; Labor Supply; Public Finance
JEL Codes: H24; J22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher tax rates (H29) | increased deadweight loss (H21) |
| federal income tax and FICA taxes (H29) | labor supply (J20) |
| federal income tax and FICA taxes (H29) | economic welfare (D69) |
| changes in tax rates (H29) | indeterminate effects on labor supply (J29) |