Research Discussion Papers, Bank of Finland
No 5/2000:
Labour Supply and Income Tax Changes: A Simulation Study for Finland
Mika Kuismanen ()
Abstract: It is well known that estimation of the labour supply
function is complicated by the non-linearity of the individual’s budget
constraint. Non-linearity may be caused by a number of factors such as the
structure of the tax/benefit scheme or overtime rates. Non-linearities also
cause problems in interpreting the policy implications of the estimates. In
this study we use a well-structured econometric labour supply model that
mimics actual budget constraints as closely as possible to analyse the
labour-supply effects of different income tax regimes and systems. In
addition to the empirically-specified labour supply model, we construct,
for the first time in Finland, a behavioural microsimulation model. Our
intent is to contribute to the tax debate in Finland by simulating several
suggested changes in the tax system. Our simulation results show that none
of the proposed reforms are self-financing. Revenue-neutral move to a
proportional tax system does not have major effects on labour supply. The
most pronounced behavioural effects are achieved when marginal tax rates
are reduced at the lower end of the income tax schedule.
Keywords: microsimulation; labour supply; taxation; (follow links to similar papers)
39 pages, June 15, 2000
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