samlet årgang - Økonomisk Institut - Københavns Universitet

342
Percent
60
50
40
30
20
10
0
1966 1990 1993 2001
Reform year
Figure 6a. Marginal tax rate.
Source. Elssa et al. (2004).
Excl. benefits
Incl. benefits
NATIONALØKONOMISK TIDSSKRIFT 2005. NR. 3
Percent
60
Excl. benefits
50
40
30
20
10
0
Incl. benefits
-10 1966 1990 1993 2001
Reform year
Figure 6b. Participation tax rate.
Source. Elssa et al. (2004).
levels over the period, and they also incorporate any behavioral responses to these
tax and benefit changes along with macro/time effects on income and demographic
variables. To isolate the direct impact of federal tax reforms, we calculate the changes
in the tax rates that are attributed to the reforms alone. The results are illustrated in
Figure 7, which confirms that the decrease in effective tax rates over the 15-year period
has been driven to a large extent, by tax changes at the federal level. This was particularly
the case for the 1986 and 1993 reforms, which reduced the participation tax rate by 8
and 13 percentage points, respectively.
There is a substantial variation in wage income and tax rates across the single
mothers in the data. This heterogeneity highlights the need for using micro-simulations
to evaluate the tax reforms. Large errors may occur in more aggregate studies because
of the correlation between earnings, tax rates and tax changes. In Eissa, Kleven
and Kreiner (2004), we carry out a number of simulations assuming different elasticity
scenarios. The simulations point to substantial welfare gains for all the reforms. In
particular, this is the case for the tax reform act of 1986. In our baseline scenario with
a participation elasticity equal to 0.4 and a (compensated) hours-of-work elasticity
equal to 0.1, we obtain a welfare gain for this reform equal to 7.3 percent of labor
income. 15 The welfare effects are also high for the 1993 reform (2.3 percent of labor
income), which contained the single largest expansion of the EITC. For the 1990 and
2001 reforms, the welfare gains are not quite as large.
For all four reforms, most of the total welfare gain is generated on the extensive
margin. While 3 /4 of the gain from the 1986 tax act is created by labor market entry,
essentially all of the positive effect from the 1990 reform is driven by labor force par-
For this reform, it is interesting to note that a total labor supply elasticity of 0.6 – certainly not out of bound
of the empirical estimates – would imply Laffer curve effects. In this scenario, the large tax reductions granted
to single mothers are recouped entirely from the labor supply responses created by the reform.