Income Taxation and Labor Supply: Simulation Study of the Earned Income Tax Credit
Date Issued
2009
Date
2009
Author(s)
Chen, Fu-Li
Abstract
Since 1975, Earned Income Tax Credit (EITC) has been executed in some states of America, going through series of expanding act to exercise in many states, nowadays EITC has been one of the largest amount of expending and the most highly growing social welfare program of America. As result of the success of EITC in America, this program has been exercised in many countries successively. The operation of EITC is, depending on the worker’s labor income, giving worker some different rates of subsidy, and the primary purposes of this EITC program are to encourage non-working labor to work and subsidy poor working workers.n Taiwan, the research of combination taxation and labor supply is poor, and such referring research lacks the simulation of EITC. when giving the particular rate of subsidy (like the EITC) or tax (like the comprehensive income tax), the labor will face the kink-point-piecewise-linear budget, and the marginal wage rate depends on the labor hours; this shape of budget constraints will cause the difficulties in the process of estimating labor supply function, and this difficulties may be the reason why this relating research in Taiwan is poor. However, if we directly use traditional econometric method such as Tobit and OLS, which simplify the piece-wise linear to be the linear budget, to estimate the reduced form labor supply will cause serious endogeneity problem and we doubt the estimated results by this traditional way.n the first part of this thesis, mainly referring to the Triest (1990) empirical method, we use the Two Error Model (TEM), which is generally thought can effectively solve the endogeneity problem. First, we use the 95 year Survey of Family Income and Expenditure Data, by OLS method, to estimate the unearned labor income in the 95 year Manpower Survey Statistics data which lacks this unearned labor income. After that, we can use TEM to estimate the 20-60 aged husband and wife structural form labor supply function respectively. In the second part, we design different EITC programs, considering the comprehensive income tax, then statically simulate the effect of this EITC programs.his research finds that directly using the Tobit and OLS method to estimate will cause serious endogeneity problems, even causing the sign of estimated parameters been changed. Second, we find that the estimated results are obviously different between the OLS or Tobit which estimate using the nominal wage rate and the TEM, and the TEM could improve the statistical significance of those important economic independent variable, it seems that the worker could understand themselves entire piecewise-linear budget constraints. Third, wife chooses labor hours are more gathering at kink point than husband does, and wife’s elasticity of substitution is bigger than husband’s. Fourth, by the simulation of the EITC, we find that when the biggest tax credit rising, workers choose their labor hours will be more gathering the biggest tax credit region, and their changes of choosing piece-wise budget regions are very obviously. When the biggest tax credit is 48,000, phase-in and phase-outate are 40% and 20% respectively, this EITC program could cause husband and wife on average reduce 6.9% and 8.4% labor hours respectively. Finally, no matter what the biggest tax credit is, on average, the EITC program will encourage about 60% non-working family to work.
Subjects
EITC
piecewise-linear budget constraints
two error model
labor supply function
taxation simulation
comprehensive income tax
Type
thesis
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