The Effects of Progressive Taxation on Labor Supply When Hours and Wages are Jointly Determined

37 Pages Posted: 4 Mar 2003

See all articles by Daniel Aaronson

Daniel Aaronson

Federal Reserve Bank of Chicago

Eric French

Department of Economics; Institute for Fiscal Studies (IFS)

Date Written: December 6, 2002

Abstract

This paper extends a standard intertemporal labor supply model to account for progressive taxation as well as the joint determination of hourly wages and hours worked. We show, qualitatively and quantitatively, that these two factors have important implications for estimating the intertemporal elasticity of substitution. Furthermore, we show how to use this corrected parameter to interpret the labor supply response to a tax change. Failure to account for wage-hours ties within a progressive tax system leads to an hours response to a change in marginal tax rates that may be biased downwards by as much as 10 percent for men and 17 percent for women.

Suggested Citation

Aaronson, Daniel and French, Eric, The Effects of Progressive Taxation on Labor Supply When Hours and Wages are Jointly Determined (December 6, 2002). Available at SSRN: https://ssrn.com/abstract=367175 or http://dx.doi.org/10.2139/ssrn.367175

Daniel Aaronson

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604-1413
United States

Eric French (Contact Author)

Department of Economics ( email )

Gower Street
London, WC1E 6BT
United Kingdom

Institute for Fiscal Studies (IFS) ( email )

7 Ridgmount Street
London, WC1E 7AE
United Kingdom

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