Income Tax Revenue Elasticities with Endogenous Labour Supply

John Creedy and Norman Gemmell

No 02/22, Treasury Working Paper Series from New Zealand Treasury

Abstract: It is important for the design of tax policy to be able to measure reliably the income elasticity of tax revenue. This gives the extent to which tax revenues change as a result of a change in earnings. Analytical expressions for income tax revenue elasticities treat earnings as exogenous, so that they do not accommodate the endogenous response of labour supply to the income tax system. This paper shows how these expression can be adapted to allow for endogenous labour supply. It identifies how far, and in what circumstances, labour supply effects are quantitatively important for revenue responsiveness estimates, both for individual taxpayers and in aggregate. It is shown that even a relatively simple tax-benefit structure can produce labour supply responses which considerably alter tax revenue elasticity calculations. It is shown that , even with modest leisure preferences, tax-wage elasticities are significantly higher that tax-income elasticities.

Keywords: Income Taxation; Revenue; Elasticity; Labour Supply (search for similar items in EconPapers)
JEL-codes: H24 H31 J22 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2002-12
New Economics Papers: this item is included in nep-pbe
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Persistent link: https://EconPapers.repec.org/RePEc:nzt:nztwps:02/22

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