Evaluation of four tax reforms in the United States: Labor supply and welfare effects for single mothers

Nada Eissa, Henrik Jacobsen Kleven, Claus Thustrup Kreiner

Research output: Contribution to journalArticlepeer-review

80 Scopus citations

Abstract

An emerging consensus is that labor force participation is more responsive to taxes and transfers than hours worked. To understand the implications of participation responses for the welfare analysis of tax reform, this paper embeds this margin of labor supply in an explicit welfare theoretic framework. We apply the framework to examine the welfare effects on single mothers in the United States following four tax acts passed in 1986, 1990, 1993, and 2001. We propose a simulation method combining features of fully structural microsimulation studies and simple deadweight loss calculations. Our approach accounts for the observed heterogeneity in the microdata, but is simple to implement because we do not need to specify utility functions and estimate utility parameters. We find that each of the four tax acts created substantial welfare gains, and that the gains were concentrated almost exclusively on the participation margin. Our results imply that standard approaches not modeling the participation decision can make large errors.

Original languageEnglish (US)
Pages (from-to)795-816
Number of pages22
JournalJournal of Public Economics
Volume92
Issue number3-4
DOIs
StatePublished - Apr 2008
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

Keywords

  • Labor supply
  • Micro-simulation
  • Single mothers
  • Tax reform
  • Welfare analysis

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