Income Taxation, Transfers and Labour Supply at the Extensive Margin

31 Pages Posted: 17 Jun 2014

See all articles by Peter Benczur

Peter Benczur

Central European University (CEU) - Department of Economics; National Bank of Hungary - Economics & Research Department

Gabor Katay

Banque de France

Aron Kiss

European Union - European Commission

Oliver M. Racz

Banque de France

Date Written: June 2014

Abstract

This paper estimates the effect of income taxation and transfers on labour supply at the extensive margin, i.e., the labour force participation. We extend existing structural form methodologies by considering the effect of both taxes and transfers. Non-labour income contains the (hypothetical) transfer amount someone gets when out of work, while the wage is replaced by the difference between net wages and the amount of lost transfers due to taking up a job (gains to work). To incorporate these components of the budget set, we employ a detailed tax-benefit model. Using data from the Hungarian Household Budget Survey (HKF), we find that participation probabilities are strongly influenced by transfers and the gains to work, particularly for low-skill groups and the elderly. Moreover, the same change in the net wage leads to a much larger change in the gains to work for low earners, making them even more responsive to wages and taxation. Overall, we find that a single equation can capture a large heterogeneity of individual responsiveness to taxes and transfers. Our parametric estimates can be readily utilized in welfare evaluations, or microsimulation analyses of tax and transfer reforms.

Keywords: participation decision, taxation, transfers

JEL Classification: H24, H31, H53, I38, J21

Suggested Citation

Benczur, Peter and Katay, Gabor and Kiss, Aron and Racz, Oliver M., Income Taxation, Transfers and Labour Supply at the Extensive Margin (June 2014). Banque de France Working Paper No. 487, Available at SSRN: https://ssrn.com/abstract=2451016 or http://dx.doi.org/10.2139/ssrn.2451016

Peter Benczur (Contact Author)

Central European University (CEU) - Department of Economics ( email )

Nador u. 9.
Budapest H-1051
Hungary

National Bank of Hungary - Economics & Research Department ( email )

Szabadsag ter 8-9
Budapest, H-1850
Hungary

Gabor Katay

Banque de France ( email )

Paris
France

Aron Kiss

European Union - European Commission ( email )

Rue de la Loi 200
Brussels, B-1049
Belgium

Oliver M. Racz

Banque de France ( email )

Paris
France

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