Validation of the discrete choice labor supply model by methods of the new tax responsiveness literature

Abstract

The static structural discrete choice labor supply model continues to be a workhorse in the process of policy-making, extensively used by policy-makers to predict labor supply effects of changes in the personal income tax system. A widely used alternative to obtain estimates of individual tax responsiveness is to exploit the diversity of tax treatment generated by a tax reform to recover tax induced outcome differences in data. Response estimates obtained from analysis of tax reforms are less useful for describing effects of prospective policies, but represent an underexploited source of information for out-of-sample validation of labor supply models. The present study describes how estimates of responses in working hours and income, generated from a tax reform, can be used to validate a discrete choice labor supply model; thus, bringing together and providing guidance to how results of two main avenues of obtaining estimates of tax responsiveness can be compared and interpreted. We find that the discrete choice model used by Norwegian policy-makers performs well as measured by this type of validation.

Problematic response margins in the estimation of the elasticity of taxable income

“…See also Kleven (2014). Kleven and Schultz (2014) found for Denmark, and as them, we find results which indicate that the self-employed are somewhat more tax responsive than the wage earners, when using findings of Thoresen and Vattø (2015) as evidence for the tax responsiveness of Norwegian wage earners (over the same reform period). Age squared 0.6×10 -4 *** -0.6×10 -4 *** -0.6×10 -4 *** -0.3×10 4 *** (0.7×10 -5 ) (0.9*10 -5 ) (0.9*10 -5 ) (0.9*10 -5 )…”

Elasticity of Taxable Income: Evidence from Changes in Municipal Income Tax Rates in Finland

“…The average ETI estimate of 0.21 is in line with many previous ETI studies (see Saez et al ., ). Following the earlier studies from the Nordic countries (Chetty et al ., ; Kleven and Schultz, , for Denmark; Thoresen and Vattø, , for Norway), this estimate is at the lower end of an international comparison. However, this estimate is clearly among the largest ones in the Nordic countries.…”

“…They report that the ETI is not significantly different from zero. In a recent paper, Thoresen and Vattø () report elasticities below 0.1 for Norway.…”

The Elasticity of Taxable Labour Income in the Netherlands

“…Feldstein, 1995;Auten and Carroll, 1999;Sillamaa and Veall, 2001;Gruber and Saez, 2002;Kopczuk, 2005;Weber, 2014;Burns and Ziliak, 2016) and for Scandinavia (e.g. Aarbu and Thoresen, 2001;Hansson, 2007;Blomquist and Selin, 2010;Holmlund and Soderstrom, 2011;Gelber, 2014;Kleven and Schultz, 2014;Thoresen and Vatto, 2015), but only a handful of studies for Continental Europe. Table A.1 in the appendix gives an overview of ETI studies.…”