Discreteness and the Welfare Cost of Labour Supply Tax Distortions

Bhattarai, Keshab; Whalley, John

Abstract

We compare the welfare costs of tax distortions of labour supply in one and two member household discrete and continuous labour supply (leisure consumption) choice models calibrated to the same aggregate uncompensated labour supply elasticities. In the discrete models taxes induce a large response from a subset of the population, while the majority of the population exhibits unchanged behaviour. In contrast the majority of the population reacts to tax changes in continuous models. Discrete choice matters as the welfare costs of similar taxes vary significantly different when individuals face discrete labour supply choices than when they choose working hours continuously.

Citation

Bhattarai, K., & Whalley, J. Discreteness and the Welfare Cost of Labour Supply Tax Distortions

• Working Paper Type: Working Paper
• Deposit Date: Feb 16, 2021
• Series Title: Department of Economics Research Reports
• Series Number: 2002-03
• Series ISSN: 0318-725X
• Public URL: https://hull-repository.worktribe.com/output/3725888
• Publisher URL: https://ir.lib.uwo.ca/economicsresrpt/396/
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