Labor supply, income distribution, and tax progressivity in a search model

Fu Zhiming, Wu Liang () and Ziguan Zhuang
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Fu Zhiming: School of Economics, Sichuan University, No. 24 South Section 1, Yihuan Road, Chengdu 610065, China
Wu Liang: School of Economics, Sichuan University, No. 24 South Section 1, Yihuan Road, Chengdu 610065, China

The B.E. Journal of Macroeconomics, 2019, vol. 19, issue 1, 18

Abstract: We develop a search model with risk-averse households to study the impact of tax progressivity on labor supply and income inequality across education groups. Labor supply responses are considered along both intensive and extensive margins. Our quantitative results are consistent with those of the existing empirical literature. First, we find that a decline in tax progressivity associated with the Tax Reform Act of 1986 has a significant impact on the aggregate labor supply with approximately 61 percent occurred along the extensive margin. Second, households differ in their labor and income responses to tax reform. A decline in tax progressivity changes the income composition of each household by affecting labor supplies and asset holdings. This leads to an increase in income inequality. Therefore, the tax share paid by the most educated group rises due to an increase in capital income after tax reforms are instituted.

Keywords: income inequality; labor supply; progressive taxation (search for similar items in EconPapers)
JEL-codes: D31 E24 E62 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1515/bejm-2017-0185

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