Labour supply specification and the evaluation of tax reforms

Abstract

This paper investigates the practical importance of the functional specification of labour supply equations for the analysis of tax/benefit reform. We consider two labour supply specifications, one derived from Stone–Geary preferences and the other from a generalisation that relaxes some of the more critical restrictions in that model. We use these equations to contrast the effects of two reforms to the U.K. income tax system; one involves income effects almost exclusively while the other implies a significant number of large increases in marginal tax rates.