Changes in Tax Progression and Labour Supply under Wage Rate Uncertainty

Erkki Koskela

Public Finance = Finances publiques, 1987, vol. 42, issue 2, 214-26

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.

Date: 1987
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Persistent link: https://EconPapers.repec.org/RePEc:pfi:pubfin:v:42:y:1987:i:2:p:214-26

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