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Labor Supply Topics

This study examines the impact of different tax systems on work effort through controlled experiments. It compares a non-linear progressive tax system (similar to the U.S. tax structure) with a linear tax system (flat income tax). The experiment, inspired by the wage-jump theorem, reveals that labor supply may increase under a linear tax structure. Participants decode tasks over several periods, with varying tax treatments impacting their pay. Results indicate effort levels may be lower under certain conditions, raising questions about gross wage influences on labor supply.

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Labor Supply Topics

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  1. Labor Supply Topics David L. Dickinson Appalachian State University April 2006: GATE.

  2. “How work effort responds to wage taxation: A non-linear versus a linear tax experiment.” M.A. Sillamaa, 1999, JEBO. • Experiment looks to test the effects of two different tax institutions • Non-linear tax system (e.g., progressive(increasing) marginal tax rate….current U.S. system) • Equivalent linear tax system (e.g.,constant marginal tax rate as with a flat income tax) • Wage-jump theorem (from Hausman, 1985) predicts higher labor supply (and possibly higher tax revenues) from linear tax system. • Footnote 1 is addressing parallelism. Experimental system designer must be prepared to answer such questions.

  3. M.A. Sillamaa, 1999, JEBO, p.221.

  4. Experimental System • Task is number decoding • Work is in 8 different, 12-minute periods • Each period allows for a different tax treatment. • Rest period between work periods • Payrate can change with each successful letter decoded (under progressive system) • Subjects could see graph of marginal pay rate change over entire work period. • Tax institution in future rounds unknown…Why? • Choice H* under progressive system determines Hausman equivalent linear tax institution.

  5. Special Issues • Controls needed for learning and ability • One can attempt to control for these in the ex ante experimental design or in the ex post data analysis • Option (not used) might be to treat data as a panel and estimate random effects. • Estimate level of constant term then takes into account individual differences in ability, and error structure allows for correlation of error terms across periods for a given individual (this might control for learning…..I’m not sure on this)

  6. Results • Claim is that effort levels are higher under linehi than proghi….support for wage jump theorem • Potential Issue(s) • Effort in proghi treatment is lower than effort in proglo treatment (see Table 3)……..seems to contradict theory • Result of higher effort rests on assumption of gross wage increase. Does that mean gross wage decrease will actually lower effort more under linear system? (reference point seems to be important)

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