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3 - Public > 7 - Labour supply and taxes > Flashcards

7 - Labour supply and taxes Flashcards

1
Q

why are labour supply responses important to consider when choosing tax rates

A
  • if people arent very responsive then we can carry out a lot of redistribution without efficiency loss
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2
Q

the more elastic tax payers are..

A

the lower the optimal tax rate

  • efficiency loss
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3
Q

what are the 2 dimensions of labour supply responses

A
  1. intensive = hours of work
  2. extensive = whether to work or not
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4
Q

what happens to reported earnings at the top of the income distribution

A
  1. tax avoidance = legal
  2. tax evasion = illegal
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5
Q

income effect

A

the pound increase in earnings if person receives £1 extra in non-labour income

  • IE = wdl/dR
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6
Q

what is the Slutsky equation

A

eu = ec + IE

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7
Q

what does uncompensated elasticity of labour supply

A

the % change in hours when net wage w increases by 1%

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8
Q

what is compensated elasticity

A

choice between consumption and leisure conditional on being on the same indifference curve

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9
Q

what is the basic OLS equation to estimate uncompensated elasticity of labour supply

A

dv = hours worked
ev = wage rate, non labour income, age demographic controls

coefficient B = uncompensated wage effects and Y measures income effects

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10
Q

what are the findings for OLS regression to find eu

A
  • small elasticities for men
  • large elasticity for women - because secondary earner = but reduces the more women work
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11
Q

what are the issues with OLS regression

A

assumption that wi is uncorrelated with ei error term inorder for B to be unbiased

  • Omitted variable bias = highly skilled individuals compared to low have a higher taste for work - so earn more have higher w
  • so will B will overestimate w
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12
Q

why is looking at tax changes better than OLS regression

A
  • OLS = OVB - biased estimates
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13
Q

what is a good method used by literature to estimate elasticities

A

look at variation in taxes and transfers

  • random experiment = not feasible
  • natural experiments
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14
Q

Ashenfelter 1990
what do they test and do

A
  • randomised experiment
  • exogenously changes taxes and transfers
  • what is the effect of increasing tax rate/ increasing G –> on labour supply - how does it effect hours worked
  • several random groups with 75 hhs in each group
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15
Q

what is the graphical response from going from control group of no tax and grant –> to G and tax rate

A
  • negative income and substitution effect
  • ambiguous effect on C
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16
Q

what were the findings from negative income tax experiments
Ashenfelter 1990

A
  • statically significant labour supply response but small
  • earnings elasticity 0.1 for men = 1% increase in net of tax rate = increases hours worked by 0.1 hours
  • earnings elasticity 0.5 for women - concentrated at extensive margin
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17
Q

why are randomised experiments rare

what to use instead

A
  • costly to implement

natural experiments = natural variation that can be exploited

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18
Q

Imbens 2001
what did they do and what were they testing

A

do people change their hours of work after they win the lottery (pure income effect)

  • survey of lottery winners and nonwinners - did they change hours worked
  • lottery = random assingment
  • non winners = control
  • winners
  • diff in diff
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18
Q

Imbens 2001
what did they find

whats a problem with this

A
  • small income effects between -0.05 and -0.1
  • survey has problem of attrition = lazy people more likely to drop = same people likely to stop working
  • so the results could be underestimation
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18
Q

Cesarini 2017
what did they do and what were they testing

A
  • swedish bank detail
  • look at effects of wealth on individuals income earnings
  • no attrition
  • extensive and intensive labour supply
  • small significant income effect
  • effects the spouse but not as much as the winner
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18
Q

Tazhitdinova (2022)
what did they do and what were they testing

A

testing for labour supply substitution effects

  • uses 2003 German reform that made secondary jobs (paying less than 400 a month) tax free –> changed the tax rate
  • what is the effect on percentage of people holding secondary jobs over time
  • diff in diff
19
Q

what is the key assumption for diff in diff

A

parallel trend assumption

  • T and C has to be parallel before
  • assume T would be where C is without the reform
20
Q

Tazhitdinova (2022)
what did they find

A
  • more people took secondary jobs
  • <400 = 7% from 2.5%
  • 400<1000 - drop in jobs because of notch
  • > 1000 = no effect
  • people didnt reduce primary jobs
21
Q

what was the US welfare to workfare reform
1996

A
  • provides more incentives to work
  • require them to get job training
  • limiting the duration of benefits
  • reducing phase out rates
22
Q

Card (2022)
what did they do and what were they testing

A
  • what is the employment effect after earnings subsidy given to treatment group for 36 months in 1990s
  • significant tax cut = incentivise people to work
  • control dont get the subsidy
23
Q

Card (2022)
what did they find

A
  • subsidy increases employment during the experiment relative to control
  • effect vanishes when the subsidy stops - by month 52 employment is same level as control
  • no LR effects in employment from subsidy
24
Q

what is the EITC

A
  • largest means tested cash transfer for US
  • eligible = low earning families with kids
  • refundable tax credit
  • pyramid shape - phase in, plateau, phase out
  • should encourage people to work - extensive labour supply margin
25
Q

what is the intensive labour supply response for EITc

A

phase in = ambiguous
plateau = reduce work
phase out = reduce work

26
Q

kleven 2019
did EITC increase LFP for single women with kids

A
  • treatment = with kids
  • control = without kids
  • yes singificant increase in LFP for single women with kids following 1990 expansion of EITC
  • unlikely that EITC explains all - changing social norms, economic boom, welfare reform
  • means that EITC didnt have such a big effect as initially thought
27
Q

what is the difference between kinks and notches

A

kinks = continuous tax function
- only taxed on that area

notch = discontinuous tax function
- taxed on all income

28
Q

what is a benefit of looking at notches

A

can learn what fraction of population is truly unresponsive - because no rational person would choose to be in area after notch = dominated area

  • kink = cant distinguish what is due to frictions/unresponsiveness
29
Q

why is there a decrease in density after the kink

A
  • people in area right after the kink move to bunch at B
  • still people in the space right next to the kink because people move down still
  • is not a dominated area
30
Q

Saez 2010
what do they do

A
  • uses individual tax return data from 1960-2004
  • observes if there is bunching at EITC kinks
31
Q

Saez 2010
what do they find

A
  • finds bunching at first kink of EITC mainly for self employed
  • lower mass to the right of the kink for self employed
  • finds bunching at first tax bracket where liability starts
  • no bunching at other kinks
32
Q

why is there a bigger response for self employed than wage earners

A
  • wage earners = not flexible - cant change hours worked
  • self employed - want to maximise tax refund - cheating
33
Q

why is there not more bunching at kinks

A
  1. true intensive elasticity of response maybe small - people arent responsive to the tax changes
  2. frictions = adjustment costs stop from bunching
  3. information and salience
34
Q

how do adjustment costs prevent bunching

what are examples of the costs

A
  • if costs are too high then people wont respond to small tax changes
  • getting info about taxes
  • institutional constraints about hours worked - contracts
35
Q

why do self employed and secondary workers react more to tax changes

A
  • they are more flexible
  • dont have institutional constraints
  • can easily adjust there hours to reoptimise
36
Q

Chetty 2011
what do they do

A
  • how are elasticities effected by frictions
  • use panel data with admin tax records for Denmark population
  • uses administrative data
  • highest change in tax rate for Denmark at highest kink = -29%
  • so would expect to see most bunching at the highest kink
37
Q

Chetty 2011
what do they find in terms of kinks

A
  • top kink = extra mass of distribution at top kink
  • no bunching for single men
  • bunching at top kink for married women (secondary earners)

bunching at top kink and middle for self employed

  • the larger the tax change = the higher the elasticity
38
Q

Chetty 2011
what do they find
main takeaways

A
  • larger elasticities around larger kinks
  • groups with more flexibility - respond more (more bunching for self employed and married women)
  • elasticities are small (frictions)
  • if adjustment cost is higher than benefit of labour supply change = no bunching
39
Q

why is evidence of response along extensive margin but little along intensive margin a good thing

A
  • EITC induces people to work along extensive margin
  • without discouraging work along intensive margin
40
Q

Chetty 2013
what do they do
what are they testing that is different

A
  • use US population tax return data from 1996
  • compare income distribution for wage earners in areas of high bunching (are aware of EITC) and low bunching areas (not aware)
  • look at what happens to wage earning distribution after the first birth of child - compare for low bunching/middle/high bunching deciles
41
Q

Chetty 2013
what do they find

tells us how much of bunching is due to labour supply responses and what is due to frictions (they dont know)

A

splitting wage distribution into high bunching areas and low bunching
- the difference between the 2 can be explained by the fact that they are unaware of the program = lack info

  • first child = before the first child - no difference, after first child - no change in distribution for lowest bunching decile, but bunching at kinks for highest decile
42
Q

what are the frictions on wage earners that prevent them from optimising their labour choices

A
  1. adjustment costs (fixed pay structures)
  2. cant change hours - not flexible
  3. inattention
  4. lack of info - not salient
43
Q

what is the difference in bunching graphs of kinks and notches

A

kink
- see bunching to the left
- slight decrease on the right (but not that much)
- not dominated - can enjoy higher income and higher consumption

notch
- bunching to the left
- bigger dip to the right = dominated area
- if still mass on the right = inattentive people

44
Q

which kinds of people are most driving bunching at UK kinks

A
  1. self employed
  2. big bunching in company owners - easier for them to tax avoid (shift income)
45
Q

evidence of bunching at the minimum weekly hours of work requirment

16+ hours

A
  • bunching at 16 hours for single women with kids
  • no bunching for single women without kids = not eligible for WTC
46
Q

how did social norms play a role in female labour supply

A
  • after the war = big increase in labour supply - an increase not due to increase in w or R
47
Q

what is the child penalty

A

the decrease in relative earnings between men and women after women gives birth

  • 2 years after birth = 60% drop in earnings that doesnt catch back up
48
Q
A

3 - Public (10 decks)

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