The Tax-Transfer System and Labour Supply

Michael Keane ()

MPRA Paper from University Library of Munich, Germany

Abstract: This chapter gives an overview of the male labour supply literature, focusing on what that literature implies for the design of the tax-transfer system. According to conventional wisdom, male labour supply is rather insensitive to tax rates. This, in turn, implies that the welfare losses from taxation are small. However, I will argue that: (i) the literature is not really so uniform in its conclusions as the conventional wisdom suggests, and (ii) much of the literature that does find labour supply is unresponsive to after-tax wages is not actually relevant for the setting of tax policy. This is because much of this literature has ignored human capital. I will argue that once one accounts for the effects of income taxation on the incentive to accumulate human capital, one finds evidence that labour supply is much more sensitive to income taxation than previously thought. This implies that optimal tax rates are correspondingly lower.

Keywords: labour supply; human capital; optimal taxation; income tax (search for similar items in EconPapers)
JEL-codes: D91 H21 H24 J22 J24 (search for similar items in EconPapers)
Date: 2010
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Published in Australia's Future Tax and Transfer Policy Conference - Melbourne Institute of Applied Economic and Social Research, Chapter 7 (2010): pp. 108-160

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