Kuismanen, Mika Ilmari; (2002) Empirical essays on non-linear income taxation and labour supply. Doctoral thesis (Ph.D), UCL (University College London).

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Abstract

It is well documented that elasticities from labour supply studies vary from one study to another(with or without taxes) and naturally from one country to another. A standard explanation has been that researchers have used different statistical methods and different data sets and it seems to be the case that there are no generally accepted robust way to estimate labour supply functions(with taxation). In chapter 2 we use two different data sets for the same individuals. One is the survey data and the other is register based data provided by tax authorities. We use method developed by Burtless and Haus- man(1978) and we are able to overcome some of the main criticism expressed concerning the piece-wise linear type of modelling. Special attention is given to constructing budget constraints for all individuals and we are able to estimate model taking account factors usually neglected in similar kind of analysis, like individual tax deductions and local tax rates. We estimate models using register based income information and using survey based information. Both fixed preference model and random preference model are estimated. Results indicate that using survey information compensated wage elasticities are significantly higher than using register based information. In their seminal paper MaCurdy et al.(1990) suggested a new approach which utilises a differentiable budget constraint approach to approximate piece-wise linear marginal tax rate function. We estimate labour supply function using both methods in chapter 3. Our results support the view that if one is able to mimic actual budget set closely and the degree of progression is high then these two methods are likely to give similar results. On the other hand, if the above mentioned factors are not present then the differentiable budget constraint approach is likely to be better choice. Non-linearities in budget constraints may arise for variety of reasons - the structure of the tax/benefit scheme, overtime rates etc. Non-linearities also cause problems when it comes to interpreting the policy implications of the estimates. In chapter 4 we use results got from earlier chapters and construct microsimulation model to analyse different income tax regimes and systems to labour supply behaviour. Our simulation results show that none of the reforms conducted are self financing. Revenue neutral proportional tax system do not have major effects on labour supply. Biggest behavioural responses are achieved if we reduce the marginal tax rates from the lower end of the state income tax schedule.

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