Evaluation of four tax reforms in the United States: labor supply and welfare effects for single mothers

TY - JOUR

T1 - Evaluation of four tax reforms in the United States

T2 - labor supply and welfare effects for single mothers

AU - Eissa, Nada

AU - Kleven, Henrik Jacobsen

AU - Kreiner, Claus Thustrup

N1 - JEL classification: H21, J22

PY - 2008

Y1 - 2008

N2 - 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. We 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. We propose a simulation method combining features of fully structural microsimulation studies and simple deadweight loss calculations. Our 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. We find that each of the four tax acts created substantial welfare gains, and that the gains were concentrated almost exclusively on the participation margin. Our results imply that standard approaches not modeling the participation decision can make large errors.

AB - 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. We 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. We propose a simulation method combining features of fully structural microsimulation studies and simple deadweight loss calculations. Our 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. We find that each of the four tax acts created substantial welfare gains, and that the gains were concentrated almost exclusively on the participation margin. Our results imply that standard approaches not modeling the participation decision can make large errors.

KW - Faculty of Social Sciences

KW - Public Economics

U2 - 10.1016/j.jpubeco.2007.08.005

DO - 10.1016/j.jpubeco.2007.08.005

M3 - Journal article

SN - 0047-2727

VL - 92

SP - 795

EP - 816

JO - Journal of Public Economics

JF - Journal of Public Economics

IS - 3-4

ER -