An Intertemporal Analysis of Taxation and Work Disincentives

This paper formulates an empirical model of consumption and labor supply that explicitly incorporates income taxes in a multiperiod setting. This model relies on few assumptions and provides a robust framework for estimating parameters needed to predict the response of consumption and hours of work to changes in a consumer's lifetime resource constraints. The empirical specifications developed here apply when a consumer is uncertain about future prices, taxes, income, and tastes, and the estimation of these specifications does not require explicit modeling of either a consumer's expectations or the history of a consumer. The empirical model accommodates both progressive and regressive tax schemes. Estimation of the model involves no complicated procedures; a full set of parameter estimates can be obtained with the application of standard two-stage least squares techniques. The final sect ion of the paper estimates a particular specification of the model using data from the Denver Income Maintenance Experiment. The empirical formulations proposed here are particularly well suited to deal with the kinds of tax schemes used in NIT experiments and the limited duration of those programs.