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Changes in Tax Progression and Labour Supply under Wage Rate Uncertainty

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  • Koskela, Erkki

Abstract

By decomposing labor supply response in to income, substitution, and risk effect, the role of taxation as an insurance device is exemplified. Second, it is demonstrated how increases in "pure" progression can lead to increased labor supply, thus suggesting that a widely held popular belief about the disincentive effect of increased progression may be false under wage-rate uncertainty. At the welfare optimum, however, the marginal tax rate is pushed to the point where at the margin it reduces labor supply despite the wage-rate uncertainty and risk-sharing effect of the marginal tax rate.

Suggested Citation

  • Koskela, Erkki, 1987. "Changes in Tax Progression and Labour Supply under Wage Rate Uncertainty," Public Finance = Finances publiques, , vol. 42(2), pages 214-226.
    • Handle: RePEc:pfi:pubfin:v:42:y:1987:i:2:p:214-26
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    Cited by:

    1. Cremer, Helmuth & Gahvari, Firouz, 1995. "Uncertainty and optimal taxation: In defense of commodity taxes," Journal of Public Economics, Elsevier, vol. 56(2), pages 291-310, February.
    2. Shih-Ying Wu, 2004. "Tax Effects on Charitable Giving in the Presence of Uncertainty," Public Finance Review, , vol. 32(5), pages 459-482, September.
    3. Anderberg, Dan & Andersson, Fredrik, 2003. "Investments in human capital, wage uncertainty, and public policy," Journal of Public Economics, Elsevier, vol. 87(7-8), pages 1521-1537, August.

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