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The B.E. Journal of Macroeconomics

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Labor supply, income distribution, and tax progressivity in a search model

Zhiming Fu
  • School of Economics, Sichuan University, No. 24 South Section 1, Yihuan Road, Chengdu 610065, China
  • Other articles by this author:
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/ Liang Wu
  • Corresponding author
  • School of Economics, Sichuan University, No. 24 South Section 1, Yihuan Road, Chengdu 610065, China
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/ Ziguan Zhuang
  • School of Finance, Zhongnan University of Economics and Law, No. 182 Nanhu Avenue, East Lake High-tech Development Zone, Wuhan 430073, China
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Published Online: 2018-09-08 | DOI: https://doi.org/10.1515/bejm-2017-0185

Abstract

We develop a search model with risk-averse households to study the impact of tax progressivity on labor supply and income inequality across education groups. Labor supply responses are considered along both intensive and extensive margins. Our quantitative results are consistent with those of the existing empirical literature. First, we find that a decline in tax progressivity associated with the Tax Reform Act of 1986 has a significant impact on the aggregate labor supply with approximately 61 percent occurred along the extensive margin. Second, households differ in their labor and income responses to tax reform. A decline in tax progressivity changes the income composition of each household by affecting labor supplies and asset holdings. This leads to an increase in income inequality. Therefore, the tax share paid by the most educated group rises due to an increase in capital income after tax reforms are instituted.

Keywords: income inequality; labor supply; progressive taxation

JEL Classification: D31; E24; E62

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About the article

Published Online: 2018-09-08


Funding Source: Sichuan University

Award identifier / Grant number: skyb201506 and skqy201766

Funding Source: Sichuan University

Award identifier / Grant number: 2018hhs-49

Funding Source: National Social Science Foundation

Award identifier / Grant number: 18BJL075

This study is supported through Sichuan University Grants skyb201506 and skqy201766. The study is financially supported by the Sichuan University Innovation fund with grand number 2018hhs-49, and by the National Social Science Foundation of China with grand number 18BJL075.


Citation Information: The B.E. Journal of Macroeconomics, 20170185, ISSN (Online) 1935-1690, DOI: https://doi.org/10.1515/bejm-2017-0185.

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