A paper by Henrik Kleven, (joint with Nada Eissa and Claus Thustrup Kreiner) "Evaluation of Four Tax Reforms in the United States: Labour Supply and Welfare Effects for Mothers," has recently been published in the Journal of Public Economics,92, 2008, pp.795-816.
An emerging consensus is that labor force participation is more responsive to taxes and transfers than hours worked. To understand the implications of participation responses for the welfare analysis of tax reform, this paper embeds this margin of labor supply in an explicit welfare theoretic framework. The authors apply the framework to examine the welfare effects on single mothers in the United States following four tax acts passed in 1986, 1990, 1993, and 2001. They propose a simulation method combining features of fully structural microsimulation studies and simple deadweight loss calculations. Their approach accounts for the observed heterogeneity in the microdata, but is simple to implement because we do not need to specify utility functions and estimate utility parameters. They find that each of the four tax acts created substantial welfare gains, and that the gains were concentrated almost exclusively on the participation margin. Their results imply that standard approaches not modeling the participation decision can make large errors.
An emerging consensus is that labor force participation is more responsive to taxes and transfers than hours worked. To understand the implications of participation responses for the welfare analysis of tax reform, this paper embeds this margin of labor supply in an explicit welfare theoretic framework. The authors apply the framework to examine the welfare effects on single mothers in the United States following four tax acts passed in 1986, 1990, 1993, and 2001. They propose a simulation method combining features of fully structural microsimulation studies and simple deadweight loss calculations. Their approach accounts for the observed heterogeneity in the microdata, but is simple to implement because we do not need to specify utility functions and estimate utility parameters. They find that each of the four tax acts created substantial welfare gains, and that the gains were concentrated almost exclusively on the participation margin. Their results imply that standard approaches not modeling the participation decision can make large errors.
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