Taxes, Deadweight Loss and Intertemporal Female Labor Supply: Evidence from Panel Data

Very few existing studies have estimated female labor supply elasticities using a U.S. panel data set, although cross-sectional studies abound. Also, most existing studies have done so in a static framework. I make an attempt to fill the gap in this literature by estimating a lifecycle-consistent specification with taxes, in a limited dependent variable framework, on a panel of married females from the PSID. Both parametric random effects and semiparametric fixed effects methods are applied. I find evidence of larger substitution effects than found in female labor supply literature with taxes, suggesting considerable distortionary effects from income taxation. The uncompensated wage elasticity is estimated at 1.4, which is comparable to estimates found in other labor supply studies with taxes. The income effect in a lifecycle-consistent specification is negative and very small. The estimate of compensated elasticity for females in the sample is 1.4 using random effects estimator and 1.35 using semiparametric fixed effect estimator. I estimate exact deadweight loss from taxes and find that deadweight loss from a 20% increase in the marginal tax rate is about 30% of tax revenue collected, evaluated at the sample mean. The deadweight loss from taxation of wife's labor income from 1980-1987, for a median household, is estimated to be 57% of tax revenue as opposed to 49% for a switch to a revenue-neutral proportional tax system. Finally, the intertemporal preference parameters are estimated using GMM.