How much additional tax revenue can the government generate by increasing labor income taxes? In this paper we provide a quantitative answer to this question, and study the importance of the progressivity of the tax schedule for the ability of the government to generate tax revenues. We develop a rich overlapping generations model featuring an explicit family structure, extensive and intensive margins of labor supply, endogenous accumulation of labor market experience as well as standard intertemporal consumption-savings choices in the presence of uninsurable idiosyncratic labor productivity risk. We calibrate the model to US macro, micro and tax data and characterize the labor income tax Laffer curve under the current choice of the progressivity of the labor income tax code as well as when varying progressivity. We find that more progressive labor income taxes significantly reduce tax revenues. For the US, converting to a flat tax code raises the peak of the Laffer curve by 6%, whereas converting to a tax system with progressivity similar to Denmark would lower the peak by 7%. We also show that, relative to a representative agent economy tax revenues are less sensitive to the progressivity of the tax code in our economy. This finding is due to the fact that labor supply of two earner households is less elastic (along the intensive margin) and the endogenous accumulation of labor market experience makes labor supply of females less elastic (around the extensive margin) to changes in tax progressivity.

a b s t r a c tAmericans work more than Europeans. Using micro-data from the United States and 17 European countries, we document that women are typically the largest contributors to the cross-country differences in work hours. We also show that there is a negative relation between taxes and annual hours worked, driven by men, and a positive relation between divorce rates and annual hours worked, driven by women. In a calibrated life-cycle model with heterogeneous agents, marriage and divorce, we find that the divorce and tax mechanisms together can explain 45% of the variation in labor supply between the United States and the European countries.& 2015 Elsevier B.V. All rights reserved. IntroductionIt is a well-known empirical finding that aggregate hours worked are higher in the United States than in Europe and that there is also substantial variation among European countries; see for instance Prescott (2004) and Rogerson (2006). These differences deserve attention: Rogerson (2006) notes that they are an order of magnitude larger than the fluctuations at business cycle frequencies in post-WWII U.S. data. Are the differences in hours worked due to public policies or are they due to other fundamental differences between societies?This paper has two contributions: first, it documents, using cross-country data, that there is a negative relation between taxes and annual hours worked and a positive relation between divorce rate and annual hours worked. While the first relation is well-known, the second one is new, at least from a cross-country perspective. Furthermore, this paper shows that the negative relation between taxes and hours is driven by the behavior of men (i.e. for women the correlation between taxes and hours is close to zero) and the positive relation between divorce and hours is driven by the behavior of women (i.e. for men the correlation between divorce and hours is close to zero).Second, motivated by these two facts, this paper builds a life cycle model economy populated by heterogenous agents in which both taxes and marital instability affect hours of work. In the model economy, the marital transitions are exogenous, but given these exogenous transitions agents adjust their labor supply and savings behavior. An important assumption is that the labor force participation is associated with higher future earnings, as agents accumulate experience. The model is then calibrated to the U.S. and is used to evaluate how much cross-country differences in taxes and marriage and divorce rates can account for cross-country differences in hours worked. To this end, we use the calibrated economy and change taxes and/or marriage and divorce rates. The results show that taxes play an important role for differences in male hours, while differences in marriage and divorce explain differences in female hours.We begin by using micro-level data to document the contribution of various demographic groups to the aggregate differences in hours worked between the U.S. and 17 European countries (Western Europe, except Icelan...

How much additional tax revenue can the government generate by increasing the level of labor income taxes? In this paper, we argue that the degree of tax progressivity is a quantitatively important determinant of the answer to this question. To make this point, we develop a large scale overlapping generations model with single and married households facing idiosyncratic income risk, extensive and intensive margins of labor supply, as well as endogenous accumulation of human capital through labor market experience. We calibrate the model to U.S. macro, micro, and tax data and characterize the labor income tax Laffer curve for various degrees of tax progressivity. We find that the peak of the U.S. Laffer curve is attained at an average labor income tax rate of 58normal%. This peak (the maximal tax revenues the government can raise) increases by 7normal% if the current progressive tax code is replaced with a flat labor income tax. Replacing the current U.S. tax system with one that has Denmark' s progressivity would lower the peak by 8normal%. We show that modeling the extensive margin of labor supply and endogenous human capital accumulation is crucial for these findings. With joint taxation of married couples (as in the U.S.), higher tax progressivity leads to significantly lower labor force participation of married women and substantially higher labor force participation of single women, an effect that is especially pronounced when future wages of females depend positively on past labor market experience.

We compare the performance of the perturbation-based (local) portfolio solution method of Sutherland (2010a, 2011) with a global solution method. We find that the local method performs very well when the model is designed to capture stylized macroeconomic facts and countries/agents are symmetric, i.e. when the latter have similar size, face similar risks and trade assets with similar risk properties. It performs less satisfactory when the agents engaged in financial trade are asymmetric. The global solution method performs substantially better when the model is parameterized to match the observed equity premium, a key stylized finance fact.

How much additional tax revenue can the government generate by increasing labor income taxes? In this paper we provide a quantitative answer to this question, and study the importance of the progressivity of the tax schedule for the ability of the government to generate tax revenues. We develop a rich overlapping generations model featuring an explicit family structure, extensive and intensive margins of labor supply, endogenous accumulation of labor market experience as well as standard intertemporal consumption-savings choices in the presence of uninsurable idiosyncratic labor productivity risk. We calibrate the model to US macro, micro and tax data and characterize the labor income tax Laffer curve under the current choice of the progressivity of the labor income tax code as well as when varying progressivity. We find that more progressive labor income taxes significantly reduce tax revenues. For the US, converting to a flat tax code raises the peak of the Laffer curve by 6%, whereas converting to a tax system with progressivity similar to Denmark would lower the peak by 7%. We also show that, relative to a representative agent economy tax revenues are less sensitive to the progressivity of the tax code in our economy. This finding is due to the fact that labor supply of two earner households is less elastic (along the intensive margin) and the endogenous accumulation of labor market experience makes labor supply of females less elastic (around the extensive margin) to changes in tax progressivity.