Keywords: Intertemporal labor supply, taxation.
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.
Full paper (498 KB PDF)
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Last update: October 6, 2005