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Labour Supply in a Two-Period Model: The Effect of a Nonlinear Progressive Income Tax

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  • N. Sören Blomquist

Abstract

Earlier studies of labour supply in a life cycle context have typically either neglected taxes completely, or represented the income tax by a linear function. The present paper studies how the qualitative conclusions of a "traditional" life cycle model of labour supply are changed when a nonlinear tax is introduced into the model. It is shown that the comparative statics results, and the characterization of the consumption and labour supply paths, depend critically on whether capital and labour income are taxed jointly or separately, and on the progressivity (nonlinearity) of the income tax. Few of the results valid for a linear income tax carry over to the nonlinear case.

Suggested Citation

  • N. Sören Blomquist, 1985. "Labour Supply in a Two-Period Model: The Effect of a Nonlinear Progressive Income Tax," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 52(3), pages 515-524.
    • Handle: RePEc:oup:restud:v:52:y:1985:i:3:p:515-524.
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    Cited by:

    1. Daniel Aaronson & Eric French, 2004. "The Effect of Part-Time Work on Wages: Evidence from the Social Security Rules," Journal of Labor Economics, University of Chicago Press, vol. 22(2), pages 329-352, April.
    2. Adam Looney & Monica Singhal, 2005. "The effect of anticipated tax changes on intertemporal labor supply and the realization of taxable income," Finance and Economics Discussion Series 2005-44, Board of Governors of the Federal Reserve System (U.S.).
    3. Blundell, Richard & Macurdy, Thomas, 1999. "Labor supply: A review of alternative approaches," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 27, pages 1559-1695, Elsevier.
    4. Daniel Aaronson & Eric French, 2009. "The Effects of Progressive Taxation on Labor Supply when Hours and Wages Are Jointly Determined," Journal of Human Resources, University of Wisconsin Press, vol. 44(2).
    5. James P. Ziliak, 2015. "Temporary Assistance for Needy Families," NBER Chapters, in: Economics of Means-Tested Transfer Programs in the United States, Volume 1, pages 303-393, National Bureau of Economic Research, Inc.
    6. Michael P. Keane & Nada Wasi, 2016. "Labour Supply: The Roles of Human Capital and The Extensive Margin," Economic Journal, Royal Economic Society, vol. 0(592), pages 578-617, May.
    7. Anil Kumar, 2016. "Lifecycle-consistent female labor supply with nonlinear taxes: evidence from unobserved effects panel data models with censoring, selection and endogeneity," Review of Economics of the Household, Springer, vol. 14(1), pages 207-229, March.
    8. David Domeij & Martin Floden, 2006. "The Labor-Supply Elasticity and Borrowing Constraints: Why Estimates are Biased," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 242-262, April.
    9. Keane, Michael, 2010. "The Tax-Transfer System and Labour Supply," MPRA Paper 55167, University Library of Munich, Germany.
    10. Michael P. Keane, 2011. "Labor Supply and Taxes: A Survey," Journal of Economic Literature, American Economic Association, vol. 49(4), pages 961-1075, December.
    11. Anil Kumar, 2012. "Nonparametric estimation of the impact of taxes on female labor supply," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 27(3), pages 415-439, April.
    12. Mikhail Golosov & Michael Graber & Magne Mogstad & David Novgorodsky, 2024. "How Americans Respond to Idiosyncratic and Exogenous Changes in Household Wealth and Unearned Income," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 139(2), pages 1321-1395.
    13. James P. Ziliak & Thomas J. Kniesner, 2005. "The Effect of Income Taxation on Consumption and Labor Supply," Journal of Labor Economics, University of Chicago Press, vol. 23(4), pages 769-796, October.
    14. Christian Bredemeier & Jan Gravert & Falko Juessen, 2023. "Accounting for Limited Commitment between Spouses when Estimating Labor-Supply," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 547-578, December.
    15. Christian Bredemeier & Jan Gravert & Falko Juessen, 2019. "Estimating Labor Supply Elasticities with Joint Borrowing Constraints of Couples," Journal of Labor Economics, University of Chicago Press, vol. 37(4), pages 1215-1265.
    16. Laisney, François & Lechner, Michael & van Soest, Arthur & Wagenhals, Gerhard, 1993. "A Life Cycle Labour Supply Model with Taxes Estimated on German Panel Data: The Case of Parallel Preferences," ZEW Discussion Papers 93-01, ZEW - Leibniz Centre for European Economic Research.
    17. Ziliak, J.P. & Kniesner, T.J., 1996. "The Importance of Sample Attrition in Life Cycle Labor Supply," Discussion Paper 1996-46, Tilburg University, Center for Economic Research.
    18. Graber, Michael & Mogstad, Magne & Torsvik, Gaute & Vestad, Ola, 2022. "Behavioural responses to income taxation in Norway," Memorandum 4/2022, Oslo University, Department of Economics.
    19. Bredemeier, Christian & Gravert, Jan & Juessen, Falko, 2021. "Accounting for Limited Commitment between Spouses When Estimating Labor-Supply Elasticities," IZA Discussion Papers 14226, Institute of Labor Economics (IZA).
    20. Anil Kumar, 2004. "Taxes, Deadweight Loss and Intertemporal Female Labor Supply: Evidence from Panel Data," Center for Policy Research Working Papers 61, Center for Policy Research, Maxwell School, Syracuse University.
    21. Karen Smith Conway, 1999. "Are Workers “Ricardian†? Estimating the Labor Supply Effects of State Fiscal Policy," Public Finance Review, , vol. 27(2), pages 160-193, March.

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