TY  - JOUR
AU  - Cudmore,Edgar
AU  - Whalley,John
TI  - Regeneration, Labour Supply and the Welfare Costs of Taxes
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10138
PY  - 2003
Y2  - December 2003
UR  - http://www.nber.org/papers/w10138
L1  - http://www.nber.org/papers/w10138.pdf
N1  - Author contact info:
Edgar Cudmore
The University of Western Ontario
Department of Economics
London, Ontario, Canada, N6A 5C2
E-Mail: elcudmor@uwo.ca

John Whalley
Department of Economics
Social Science Centre
University of Western Ontario
London, ON N6A 5C2
CANADA
Tel: 519/661-3509
Fax: 519/661-3666
E-Mail: jwhalley@uwo.ca
AB  - This paper sets out alternatives to the traditional model of labour supply used to analyse the welfare costs of income and/or sales taxes when preferences are defined over goods and leisure and the market wage yields the slope of the budget constraint. The innovation in our work is to assume that some or all of non market time is used to regenerate the productivity of labour through rest and relaxation. This model has no closed form solution, but we can work with the first order conditions numerically for specific functional forms using non linear solution software. We generate a number of alternative parameterizations of this model through a series of calibrations to the same synthetic base case data set. Across the resulting parameterizations the welfare costs of taxes vary substantially (by a factor of twenty fold in some counterfactual analyses), even though they all involve calibration to the same base case data and labour supply elasticity. These results thus suggest that a small and seemingly plausible departure from a standard model (even if not in closed form) that has dominated the economic literature for many years can yield substantial change for perspectives on policy interventions.
ER  -