The Effect of Anticipated Tax Changes on Intertemporal Labor Supply and the Realization of Taxable Income

40 Pages Posted: 5 Jan 2006

See all articles by Adam Looney

Adam Looney

Brookings Institution; U.S. Department of the Treasury, Office of Tax Analysis (OTA)

Monica Singhal

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: September 2006

Abstract

We use anticipated changes in tax rates associated with changes in family composition to estimate intertemporal labor supply elasticities and elasticities of taxable income with respect to the net-of-tax wage rate. A number of provisions of the tax code are tied explicitly to child age and dependent status. Changes in the ages of children can thus affect marginal tax rates through phase-in or phase-out provisions of tax credits or by shifting individuals across tax brackets. We identify the response of labor and income to these tax changes by comparing families who experienced a tax rate change to families who had a similar change in dependents but no resulting tax rate change. A primary advantage of our approach is that the changes are anticipated and therefore should not cause re-evaluations of lifetime income. The estimates of substitution effects should consequently not be confounded by life-cycle income effects. The empirical design also allows us to compare similar families and can be used to estimate elasticities across the income distribution. In particular, we provide estimates for low and middle income families. Using data from the Survey of Income and Program Participation (SIPP), we estimate an intertemporal elasticity of family labor earnings close to one for families earning between $30,000 and $75,000. Our estimates for families in the EITC phase-out range are lower but still substantial. Estimates from the IRS-NBER individual tax panel are consistent with the SIPP estimates. Tests using alternate control groups and simulated placebo tax schedules support our identifying assumptions. The high-end estimates suggest substantial efficiency costs of taxation.

Keywords: Intertemporal labor supply, taxation

JEL Classification: H2

Suggested Citation

Looney, Adam and Singhal, Monica, The Effect of Anticipated Tax Changes on Intertemporal Labor Supply and the Realization of Taxable Income (September 2006). FEDs Working Paper No. 2005-44, KSG Working Paper No. RWP06-031, Available at SSRN: https://ssrn.com/abstract=873837 or http://dx.doi.org/10.2139/ssrn.873837

Adam Looney (Contact Author)

Brookings Institution ( email )

1775 Massachusetts Ave NW
Washington, DC 20036
United States
2027976068 (Phone)

HOME PAGE: http://www.brookings.edu/experts/looneya.aspx

U.S. Department of the Treasury, Office of Tax Analysis (OTA) ( email )

1500 Pennsylvania Ave. NW
Washington, DC 20220
United States

Monica Singhal

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States
617-496-5062 (Phone)
617-496-6372 (Fax)

HOME PAGE: http://ksgfaculty.harvard.edu/monica_singhal

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
106
Abstract Views
1,194
rank
235,251
PlumX Metrics