The effect of income taxation on consumption and labor supply

James P. Ziliak, Thomas J. Kniesner

Research output: Contribution to journalArticlepeer-review

41 Scopus citations

Abstract

We estimate the incentive effects of income taxation in a life-cycle model of consumption and labor supply without intratemporal strong separability. We find that consumption and hours worked are direct complements in utility; both increase with a compensated increase in the net wage. The compensated net wage elasticity is about 0.3, nearly double estimates for U.S. men from a linear labor supply specification. Estimated intertemporal elasticities indicate significant intertemporal smoothing of utility. The estimated marginal welfare cost of government revenue is 6%-20%, which is about half the estimated welfare cost when additivity between consumption and leisure is incorrectly imposed.

Original languageEnglish
Pages (from-to)769-796
Number of pages28
JournalJournal of Labor Economics
Volume23
Issue number4
DOIs
StatePublished - Oct 2005

ASJC Scopus subject areas

  • Industrial relations
  • Economics and Econometrics

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