Income Taxation, Transfers and Labour Supply at the Extensive Margin

P. Bencz r, G. K tay, Áron Kiss and O. R cz
Authors registered in the RePEc Author Service: Olivér Miklós Rácz, Peter Benczur and Gábor Kátay

Working papers from Banque de France

Abstract: This paper estimates the effect of income taxation and transfers on labour supply at the extensive margin, i.e., the labour force participation. We extend existing structural form methodologies by considering the effect of both taxes and transfers. Non-labour income contains the (hypothetical) transfer amount someone gets when out of work, while the wage is replaced by the difference between net wages and the amount of lost transfers due to taking up a job (gains to work). To incorporate these components of the budget set, we employ a detailed tax-benefit model. Using data from the Hungarian Household Budget Survey (HKF), we find that participation probabilities are strongly influenced by transfers and the gains to work, particularly for low-skill groups and the elderly. Moreover, the same change in the net wage leads to a much larger change in the gains to work for low earners, making them even more responsive to wages and taxation. Overall, we find that a single equation can capture a large heterogeneity of individual responsiveness to taxes and transfers. Our parametric estimates can be readily utilized in welfare evaluations, or microsimulation analyses of tax and transfer reforms.

Keywords: participation decision; taxation; transfers. (search for similar items in EconPapers)
JEL-codes: H24 H31 H53 I38 J21 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2014
New Economics Papers: this item is included in nep-eur, nep-ger, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26)

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Working Paper: Income Taxation, Transfers and Labour Supply at the Extensive Margin (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:487

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