Estimating Life Cycle Labor Supply Tax Effects

Abstract

We present an econometrically tractable life cycle labor supply model for panel data including intertemporally progressive taxes on uncertain wage and nonwage incomes. Our two-stage fixed-effects generalized method-of-moments approach first estimates intratemporal and then intertemporal preferences. Specification testing demonstrates the value of incorporating joint progressive taxation of labor and nonlabor incomes. Results for prime-age men emphasize the roles played by hourly wage endogeneity, worker-specific effects, the measure of the rate of pay, and intertemporal budget constraint nonseparability. Simulations indicate that recent tax reforms, while not self-financing, stimulated male labor supplied by about 3 percent and reduced deadweight loss by about 16 percent.

JEL Classification: H21, J22