Taxes on Labor Supply Flashcards
What are the effect of taxes
The fall in the net (after-tax) wage induces a substitution effect toward less work.
The fall in income has an income effect, so Ava is poorer overall and buys less of all normal goods, including leisure. I.e. the income effect implies that she works more to maintain her consumption in the face of higher taxes.
Effects are opposite-signed, so the theoretical impact of taxation on labor supply is ambiguous.
If the substitution effect of the change in the after-tax wage is larger, work is less attractive, and Ava chooses to have more leisure. If the income effect is larger, Ava feels poorer and thus reduces her leisure (increases her work hours) in order to regain some of that lost income.
what are limitations on theory of taxes on labor supply (3)
Overtime pay rules also make it difficult to increase hours at a constant wage
assumed free adjustment of hours
firms may want everyone to work same hours
What is the difference between primary and secondary earners in how they are impacted by a tax
Primary earners: Family members who are the main source of labor income for a household.
Labor supply (LS) response to changes in income were positive; greater income (lower taxes) means more labor supplied, not less. High tax => lower LS.
Primary earners’ labor supply elasticity ≈0.1. (10% increase in after-tax income means 1% more hours worked)
Secondary earners’ elasticity ≈0.5.
primary earners are more responsive than secondary earners
Labor income elasticity of labor supply is
the percent change in labor supply resulting from a 100% increase in labor income
In this case, an elasticity of 0.1 means that a 10% increase in labor income leads to 1% increase in labor supply
Price elasticity of demand
percent change in demand that results from a 100% increase in price.
What are some issues with our knowledge about primary/secondary workers
- blurred lines with more married women working
hours worked is narrow measure of labor supply - doesn’t include effort, occupation, investment in human capital
tax avoidance
Elasticity of taxable income with respect to marginal tax rates
how much people increase or reduce their reported income in reaction to an increase in the tax rate on their next dollar of income, depends on tax avoidance too
tax increase of 10% has decreased taxable income by 3%. What is true about the elasticity of taxable income, tav avoidnce, and elasticity of labor supply w/ respect to taxes
The elasticity of taxable income with respect to taxes is -0.3 or less.
Some of this reaction may be due to tax avoidance, but the question does not say how much. Therefore, we don’t know specifically how much tax avoidance has increased.
What is EITC and what are the goals of EITC?
Earned Income Tax Credit (EITC): A federal income tax policy that subsidizes the wages of low-income earners.
The EITC has two goals:
Redistribution of income to lower-income groups.
Increases in the amount of labor supplied by these groups.
successful and designed to encourage labor supply
What is the effect of the eitc on 1)those in labor force 2) those not in labor force 3) those earning in flat area 4) those earning a lot more
For people not in the labor force at all, the EITC will likely raise their labor supply (substitution).
The effect on people already in the labor force who earn less than $13,870 is ambiguous (income & substitution effects in opposite directions).
EITC will lower the labor supply for people already in the labor force and earning in the flat area between $13,870 and $18,110 (income effect).
Labor supply definitely falls for people already in the labor force earning between $18,110 and $44,454 (income + substitution effect in the same direction).
How does child care subsidies and taxes affect labor supply?
child care subsidies can increase labor supply.
Child care tax deduction: this lowers parents’ taxable income, which lowers their tax liability, increasing labor supply.
care and family income inequality
impede labor supply of secondary earners
The US care infrastructure is directly responsible for increasing gender inequality and family income inequality.
Public investment in care infrastructure, lowering replacement costs, would reduce gender and family income inequality.
