Working Paper: NBER ID: w12890
Authors: Richard Rogerson
Abstract: This paper argues that it is essential to explicitly consider how the government spends tax revenues when assessing the effects of tax rates on aggregate hours of market work. Different forms of government spending imply different elasticities of hours of work with regard to tax rates. I illustrate the empirical importance of this point by addressing the issue of hours worked and tax rates in three sets of economies: the US, Continental Europe and Scandinavia. While tax rates are highest in Scandinavia, hours worked in Scandinavia are significantly higher than they are in Continental Europe. I argue that differences in the form of government spending can potentially account for this pattern.
Keywords: Taxation; Market Work; Scandinavia; Labor Supply; Government Spending
JEL Codes: E2; J2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government spending (H59) | hours worked (J22) |
| tax rates (H29) | hours worked (J22) |
| government spending programs (H53) | elasticity of hours worked with respect to tax rates (H31) |
| tax revenues (lump-sum transfers) (H29) | hours worked (J22) |
| tax revenues (family services) (H29) | hours worked (J22) |
| higher government employment and spending on family services (H59) | hours worked (J22) |
| government spending (H59) | elasticity of hours worked with respect to tax increases (H31) |
| nature of government spending (H50) | differences in employment across regions (R23) |