Lecture9a.ppt

Lecture9a.ppt - Lecture9:Otherlabor supplydistortions...

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    Lecture 9:  Other labor  supply distortions
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    Outline of lecture So far, we have explored the effects of the personal taxation of labor income on hours of work and on labor force participation These decisions are not that sensitive to tax rates, except for the young and old. However, something else must be changing, since reported labor income is very responsive to tax rates The lecture will go through a variety of other decisions that are distorted by taxes on labor income
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    Puzzle: Tax effects on hours vs. earnings If pre-tax wage rates unchanged, then reported change in hours should be proportional to reported changes in earnings. Similar studies have examined changes in reported earnings after several recent tax changes Percent changes in earnings are very large compared with percent change in hours WHY??? Many hypotheses, and now some evidence
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    Temporary financial responses to a tax  change Shift income to the lower tax year, e.g. postpone receiving a pay check until after tax rates fall. (This works only if the payer doesn’t face the same tax change.) Realize stock options sooner in order to avoid a tax increase. There is clear evidence of this prior to the increase in the top tax rate in 1993.
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    Temporary real responses to a tax  change If people face different tax rates in different years, then they have an incentive to work more when tax rates are low and take vacations when tax rates are high This shift in the timing of work easier than changing lifetime labor supply Evidence suggests a somewhat higher elasticity in response to a temporary change in tax rates
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    Changes in evasion rates If tax rates are higher, individuals may be more tempted to underreport their taxes, leading to a drop in reported taxable earnings No available evidence that evasion rates have changed over time for employees as tax rates have changed Evasion easier for the self-employed, who simply rely more on cash transactions Self-employment rate does rise considerably when tax rates go up
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    Use of non-monetary compensation Wages and salaries are taxable but many forms of non-monetary compensation are not IRS does try to tax people on the value of housing and a few other explicit forms of compensation But benefits from a nicer office, business trips to nice locations, more flexible hours, more expenditures on workplace safety, are not taxable
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This note was uploaded on 11/03/2009 for the course ACCT 130 taught by Professor Huxhold during the Spring '09 term at UCSD.

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Lecture9a.ppt - Lecture9:Otherlabor supplydistortions...

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