Labor supply, income distribution and excess burden of personal income taxation in Sweden

Abstract

The paper presents results from a labor supply study on Swedish data. The estimated labor supply model is based on a new methodological approach. This approach is well suited for taking into account complex nonlinear and non-convex budget constraints, unobservable institutional constraints on hours as well as joint labor supply decisions of married couples. The model is estimated on Swedish data from 1981. The resulting wage elasticities of total labor supply turn out to be numerically small. The model is used to simulate the effects on labor supply, income distribution and costs of taxation from replacing the 1981 tax system by a system with proportional and lump-sum taxes. The impact on labor supply is shown to be substantial despite the fact that wage elasticites are small.