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Tax Rates, Labor Supply, and the Structure of Preferences

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  • Firouz Gahvari

    (Virginia Polytechnic Institute and State University)

Abstract

This article examines the labor supply response to a change in the income tax rate when tax revenues finance the provision of government goods. It first shows that even if taxpayers value government goods directly as equivalent income, there will still exist an income effect. It then discusses the nature of the "income effect" and the issues of complementarity and substitutability that arise when government goods are not valued as equivalent income. Finally, it proves that there is no income effect associated with a cut in the income tax rate if and only if preferences are weakly separable between private and government goods and linear in nonleisure private goods.

Suggested Citation

  • Firouz Gahvari, 1991. "Tax Rates, Labor Supply, and the Structure of Preferences," Public Finance Review, , vol. 19(4), pages 466-476, October.
    • Handle: RePEc:sae:pubfin:v:19:y:1991:i:4:p:466-476
    DOI: 10.1177/109114219101900407
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    References listed on IDEAS

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    1. Gwartney, James & Stroup, Richard, 1983. "Labor Supply and Tax Rates: A Correction of the Record," American Economic Review, American Economic Association, vol. 73(3), pages 446-451, June.
    2. Sandmo, Agnar, 1983. " Progressive Taxation, Redistribution, and Labor Supply," Scandinavian Journal of Economics, Wiley Blackwell, vol. 85(3), pages 311-323.
    3. Diamond, Peter A., 1970. "Incidence of an interest income tax," Journal of Economic Theory, Elsevier, vol. 2(3), pages 211-224, September.
    4. Laurence J. Kotlikoff & Lawrence H. Summers, 1979. "Tax Incidence in a Life Cycle Model with Variable Labor Supply," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 93(4), pages 705-718.
    5. Bohanon, Cecil E & Van Cott, T Norman, 1986. "Labor Supply and Tax Rates: Comment," American Economic Review, American Economic Association, vol. 76(1), pages 277-279, March.
    6. Hausman, Jerry & Ruud, Paul, 1984. "Family Labor Supply with Taxes," American Economic Review, American Economic Association, vol. 74(2), pages 242-248, May.
    7. Gahvari, Firouz, 1986. "Labor Supply and Tax Rates: Comment," American Economic Review, American Economic Association, vol. 76(1), pages 280-283, March.
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    Cited by:

    1. Atallah, Gamal, 1998. "Les impôts sur le revenu et l’offre de travail des femmes mariées : une revue de la littérature," L'Actualité Economique, Société Canadienne de Science Economique, vol. 74(1), pages 95-128, mars.

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