On Estimating the Effect of Taxation On Labor Supply: A Methodological and Empirical Comparison of Four Estimation Procedures
Culler, Steven Dell
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https://hdl.handle.net/2142/67683
Description
Title
On Estimating the Effect of Taxation On Labor Supply: A Methodological and Empirical Comparison of Four Estimation Procedures
Author(s)
Culler, Steven Dell
Issue Date
1981
Department of Study
Economics
Discipline
Economics
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, General
Language
eng
Abstract
In the past few years there has been a resurgence of interest in the effects of a progressive tax on an individual's work effort. This resurgence has been in part a response to political efforts to reduce marginal tax rates and in part a response to advances in econometric techniques of estimating non-linear budget constraints. As a result there is a need to reexamine cross-sectional estimates of the male labor supply model, since additional estimates of the parameters of the male labor supply curve will provide a better understanding of an individual's labor supply response under a progressive tax scheme.
A detailed review of the labor supply literature indicates that most previous researchers have inadequately modeled the piecewise-linear budget constraint that results from the progressive United States Federal tax scheme. Only recently have several articles appeared in the literature which suggest alternative methodologies for obtaining consistent estimates of the labor supply curve. Thus the major objective of this study is to provide a detailed methodological and empirical comparison of the more sophisticated econometric techniques. A second objective of this thesis is to compare the predicted labor supply responses to changes in the parameters of the labor supply model in order to determine what difference, if any, the alternative estimation procedures imply for evaluating policy measures.
In general the results of the four estimation procedures can be summarized as follows. First the coefficient for the next wage rate was negative and significantly different from zero for all the estimation procedures. Secondly, the coefficient on the income variable was only negative and significantly different from zero in the Pellechio approach. As for predicting the labor supply response to changes in policy measures, all four approaches provided very similar responses in terms of magnitude. This resulted from the fact that the total wage rate, income, and compensated wage elasticities for the male labor supply curve were found to be nearly zero in all the estimation procedures.
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