Regeneration, Labour Supply and the Welfare Costs of Taxes

26 Pages Posted: 9 Dec 2003 Last revised: 15 Sep 2022

See all articles by Edgar Cudmore

Edgar Cudmore

University of Western Ontario - Department of Economics

John Whalley

University of Western Ontario - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute); Centre for International Governance and Innovation (CIGI)

Date Written: December 2003

Abstract

This paper sets out alternatives to the traditional model of labour supply used to analyse the welfare costs of income and/or sales taxes when preferences are defined over goods and leisure and the market wage yields the slope of the budget constraint. The innovation in our work is to assume that some or all of non market time is used to regenerate the productivity of labour through rest and relaxation. This model has no closed form solution, but we can work with the first order conditions numerically for specific functional forms using non linear solution software. We generate a number of alternative parameterizations of this model through a series of calibrations to the same synthetic base case data set. Across the resulting parameterizations the welfare costs of taxes vary substantially (by a factor of twenty fold in some counterfactual analyses), even though they all involve calibration to the same base case data and labour supply elasticity. These results thus suggest that a small and seemingly plausible departure from a standard model (even if not in closed form) that has dominated the economic literature for many years can yield substantial change for perspectives on policy interventions.

Suggested Citation

Cudmore, Edgar and Whalley, John, Regeneration, Labour Supply and the Welfare Costs of Taxes (December 2003). NBER Working Paper No. w10138, Available at SSRN: https://ssrn.com/abstract=476095

Edgar Cudmore

University of Western Ontario - Department of Economics ( email )

London, Ontario N6A 5B8
Canada

John Whalley (Contact Author)

University of Western Ontario - Department of Economics ( email )

London, Ontario N6A 5B8
Canada
519-661-3509, ext. 83509 (Phone)
519-661-3666 (Fax)

HOME PAGE: http://www.ssc.uwo.ca/economics/faculty/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Centre for International Governance and Innovation (CIGI) ( email )

57 Erb Street West
Waterloo, Ontario N2L 6C2
Canada

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
37
Abstract Views
705
PlumX Metrics