The Effects of Progressive Taxation on Labor Supply when Hours and Wages are Jointly Determined
This paper extends a standard intertemporal labor supply model to account for progressive taxation as well as the joint determination of hourly wages and hours worked. We show, qualitatively and quantitatively, that these two factors have implications for estimating the intertemporal elasticity of substitution. Furthermore, we show how to use the intertemporal elasticity of substitution to interpret the labor supply response to a tax change. Failure to account for wage-hours ties within a progressive tax system leads to an hours response to a change in marginal tax rates that may be understated by as much as 10 percent for men and 17 percent for women.