samlet årgang - Økonomisk Institut - Københavns Universitet

LABOR SUPPLY BEHAVIOR AND THE DESIGN OF TAX AND TRANSFER POLICY 343
Percentage points
14
12
10
8
6
4
2
0
1966 1990 1993 2001
Reform year
Figure 7. Reform-induced reductions in tax rates.
Source: Eissa et al. (2004).
Marginal tax
Participation tax
ticipation. For this reform, the intensive welfare effect is around zero because negative
effects in the phase-out region cancel out positive effects in the phase-in region of the
EITC. For the 1993 reform, the large welfare gain is a result of the extensive margin
strongly dominating welfare losses created on the intensive margin. Finally, for the
recently enacted 2001 reform, the difference between the intensive and extensive welfare
effects is less pronounced. This occurs for two reasons: First, the 2001 tax cuts
reduced participation tax rates only slightly and, second, by the year 2000 the previous
reforms had already eliminated much of the inefficiency along the extensive margin. 16
Our finding that extensive responses drive almost all of the welfare effects created
by the four reforms underpins the importance of accounting for this margin of labor
supply. A simulation based on the traditional, convex labor supply model with only
intensive responses would seriously underestimate the welfare effects. For the 1993
reform, even the sign would be wrong. Here, the intensive welfare effect in our base-
16. One might argue that our findings regarding the relative sizes of the extensive and intensive welfare
effects were to be expected under the assumed elasticity scenario. Notice, however, that the difference between
extensive and intensive welfare effects cannot be explained exclusively by elasticities, since the two
kinds of welfare effects are related in different ways to the tax-transfer system. For example, for the tax act
of 1990, increasing the hours-of-work elasticity would leave the intensive welfare effect more or less
unchanged since the losses in the phase-out region would continue to cancel out the gains created in the
phase-in region. For the 1993 reform, increasing the intensive elasticity would simply exacerbate the welfare
loss along that margin, thereby reinforcing the point regarding the difference of welfare effects along
the two margins.