Distortionary Taxation and Labor Supply

E. Cardia, N. Kozhaya and F. Ruge-Murcia
Journal of Money, Credit and Banking (2003) 35 (3), 351-373.

This paper examines empirically the effects of distortionary taxation on labor supply using a general equilibrium framework. The long-term relations predicted by the model are derived and tested using Canadian data between 1966 and 1993. While the cointegrating predictions of the model without taxation are rejected, the ones of the model with labor taxation are not. Persistent labor tax rate increases appear to play an important role in the observed downward trend in hours worked.