Template-type: ReDIF-Paper 1.0
Author-Name: Michael P. Keane
Author-Workplace-Name: University of Oxford 
Author-Email: michael.keane@economics.ox.ac.uk
Title: Effects of Permanent and Transitory Tax Changes in a Life-Cycle Labor Supply Model with Human Capital
Abstract:  I examine the effect of labor income taxation in life-cycle models where work
experience builds human capital. In this case, the wage no longer equals the opportunity cost
of time – which is, instead, the wage plus returns to work experience. This has a number of
interesting consequences: First, the data appear consistent with much larger labor supply
elasticities than most prior work suggests. Second, contrary to conventional wisdom,
permanent tax changes can have larger effects on current labor supply than temporary tax
changes. Third, human capital dampens the response of young workers to transitory tax
changes, while causing responses to both permanent and transitory tax changes to increase
with age. Fourth, human capital amplifies the labor supply response to permanent tax changes
in the long-run, as a permanent tax reduces the rate of human capital accumulation (reducing
worker productivity). 
X-Classification-JEL: 
X-Keywords: 
Length: 29 pages
Creation-Date: 2016-06-21
Number: 2016-W06
File-URL: https://www.nuffield.ox.ac.uk/economics/papers/2016/Taxes_HC_IER_Revised_Final_1.pdf
File-Format: application/pdf
Handle: RePEc:nuf:econwp:1606