Effects of Permanent and Transitory Tax Changes in a Life-Cycle Labor Supply Model with Human Capital
نویسندگان
چکیده
I examine the effect of labor income taxation in life-cycle models where work experience builds human capital. In this case, the wage no longer equals the opportunity cost of time – which is, instead, the wage plus returns to work experience. This has a number of interesting consequences: First, the data appear consistent with much larger labor supply elasticities than most prior work suggests. Second, contrary to conventional wisdom, permanent tax changes can have larger effects on current labor supply than temporary tax changes. Third, human capital dampens the response of young workers to transitory tax changes, while causing responses to both permanent and transitory tax changes to increase with age. Fourth, human capital amplifies the labor supply response to permanent tax changes in the long-run, as a permanent tax reduces the rate of human capital accumulation (reducing worker productivity). Acknowledgements: This paper was presented as the Cowles Lecture at the 2011 North American Summer Meetings of the Econometric Society. Seminar participants at the University of Minnesota, the Australian National University, the University of Melbourne, the University of Zurich, the World Congress of the Econometric Society (Shanghai), the 2010 Australian Conference of Economists, the University of California at Berkeley, the 2011 SETA Conference (Melbourne), the Federal Reserve Bank of New York, the Prescott Center at ASU, Oxford, UCL, the Becker-Friedman Institute and the LSE provided useful comments, as did two editors and three anonymous referees. Gary Becker provided especially useful comments during my visit to Chicago in November 2013. I thank Susumu Imai for providing me with many of the simulation exercises reported here. This research has been support by Australian Research Council grants FF0561843 and FL110100247, and by the AFTS Secretariat of the Australian Treasury. But the views expressed are entirely my own.
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