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

Abstract

This paper presents the results of an empirical analysis of labor supply for married couples in NorwaS, based on a new modelling approach. This new framework is particularly convenient for dealing with'complicated budget constraints such as the Norwegian case, and it can also account for restrictions on hours of work. The purpose of the present paper is to apply the estimated labor supply model to investigate the effect from different tax reforms. In particular, we study the effects on labor supply and income distribution when the 1979 tax rules are replaced by proportional taxes on gross earnings and lump-sum taxes. The proportional tax rate is derived under the constraint that the personal income tax revenue should remain unchanged and equal to the revenue in 1979. The paper also reports an estimate of the cost of taxation from changing the tax system. The estimate is based on the equivalent variation measure.