Tax Effects Versus Budget Effects on Labor Supply

Abstract

This paper analyzes the effects on labor supply of parallel changes in taxes and public spending of various types. A number of important recent developments in the labor supply behavior of households are highlighted by such a study of various types of "budget effects," rather than isolated "tax effects." This comes out in particular when considering cross substitution effects on labor supply of changes in public spending on goods and services or of the subsidization of goods and services provided by private markets. Moreover, the income effects of tax changes are often mitigated, or possibly even removed, by the income effects of the accompanying expenditure changes.

The interaction of entrepreneurship and institutions

“…In order to ensure high labor force participation despite punitive tax levels, participating in the labor force became a requirement for access to many highly subsidized services and transfers (Lindbeck 1982). Furthermore, women's participation was encouraged by subsidizing consumption complementary to work.…”

Public Employment, Taxes and the Welfare State in Sweden

“…Rather, assessing the purely economic consequences of policy requires balancing one distortion against another. These issues are examined in more detail below, using household production theory (Becker 1965;Gronau 1977;Lindbeck 1982) and the economics of the second best (Sandmo 1990). …”

Tax Perception - An Empirical Survey

“…In this setting, an increasing tax rate does not lead to a decrease in income when participants supply the same amount of labor. Nevertheless, due to a substitution effect, labor supply is expected to decrease under a balanced-budget increase in the tax rate (Lindbeck 1982).…”