Does labour supply respond to a flat tax?: Evidence from the Russian tax reform

Authors: Duncan, Denvil¹; Peter, Klara Sabirianova²

Source: Economics of Transition, Volume 18, Number 2, April 2010 , pp. 365-404(40)

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Abstract:

We exploit the exogenous change in marginal tax rates created by the Russian flat tax reform of 2001 to identify the effect of taxes on the labour supply of men and women. We apply a weighted difference-in-difference regression approach and instrumental variables to estimate labour supply functions using a panel dataset. The mean regression results indicate that the tax reform led to a statistically significant increase in hours of work for men but had no effect on work hours for women. However, we find a positive response to tax changes in both tails of the female work hour distribution. We also find that the reform increased the probability of finding a job among both men and women. Despite significant variation in individual responses, the aggregate labour supply elasticities are trivial. This suggests that reform-induced changes in labour supply are an unlikely explanation for the amplified personal income tax revenues that followed the reform.

Keywords: Labour supply; personal income tax; flat tax; labour supply elasticity; difference-in-difference; regression discontinuity; wage endogeneity; employment participation; Russia; transition

Document Type: Research article

DOI: http://dx.doi.org/10.1111/j.1468-0351.2009.00383.x

Affiliations: 1: Department of Economics, Andrew Young School of Policy Studies, Georgia State University, Atlanta, USA., Email: ecodrdx@langate.gsu.edu 2: Department of Economics, Andrew Young School of Policy Studies, Georgia State University, Atlanta, USA; CEPR; IZA Bonn., Email: kpeter@gsu.edu

Publication date: 2010-04-01