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The Effect of Income Taxation on Consumption and Labor Supply

Author

Listed:
  • James P. Ziliak

    (University of Kentucky)

  • Thomas J. Kniesner

    (Syracuse University)

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.

Suggested Citation

  • 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.
    • Handle: RePEc:ucp:jlabec:v:23:y:2005:i:4:p:769-796
    DOI: 10.1086/491611
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    More about this item

    JEL classification:

    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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