A simulation-based welfare loss calculation for labor taxes with piecewise-linear budgets

Research output: Contribution to journalArticle

Abstract

Graduated income tax rates and transfer programs create piecewise-linear budget constraints that consist of budget segments and kink points. With any change in these tax rules, each individual may switch between a kink point and a budget segment, between two budget segments, or between two kink points. With errors in the estimated labor supply equation, the new choice is uncertain, and so the welfare effects of a tax change are uncertain. We propose a simulation-based method to compute expected welfare effects that is easy to implement and that fully accounts for uncertainties about choices around kink points. Our method also provides information about expected changes in working hours.

Original languageEnglish (US)
Pages (from-to)2339-2359
Number of pages21
JournalJournal of Public Economics
Volume88
Issue number11 SPEC. ISS.
DOIs
StatePublished - Sep 2004
Externally publishedYes

Keywords

  • Labor taxes
  • Piecewise-linear budgets
  • Simulation-based welfare loss calculation

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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