# A welfare evaluation of the 1986 tax reform for married couples in the United States

- 148 Downloads

## Abstract

This paper evaluates the welfare effects of the 1986 Tax Reform Act (TRA86). We rely on different welfare metrics, which fully retain preference heterogeneity and are based on different ethical priors. We estimate utility functions with preference heterogeneity on the basis of structural models of family labor supply. Then, using these estimated preferences, we compute and compare different well-being rankings corresponding to different ways of measuring well-being. Finally, we identify the losers and the winners of TRA86, in absolute and relative terms, for each of the welfare metrics.

## Keywords

Welfare measures Tax reform Preference heterogeneity Discrete model Labor supply## JEL Classification

D63 H31 J22## Notes

### Acknowledgements

The collection of data used in this study was partly supported by the National Institutes of Health under Grant Number R01 HD069609 and the National Science Foundation under award number 1157698. We are very grateful to François Maniquet for helpful discussions and comments. We would like also to thank Marc Fleurbaey, Dirk Neumann, two anonymous reviewers, and the participants at the CORE seminar (Université catholique de Louvain) and at the Social Choice and Welfare Meeting 2014 (Boston) for their remarks and suggestions. Any remaining errors are our own.

## References

- Aaberge, R., & Colombino, U. (2013). Using a microeconometric model of household labour supply to design optimal income taxes.
*Scandinavian Journal of Economics*,*115*(2), 449–475.CrossRefGoogle Scholar - Aaberge, R., Colombino, U., Dagsvik, J. K., & Strøm, S. (1995). Labor supply responses and welfare effects of tax reforms.
*Scandinavian Journal of Economics*,*97*(4), 635–659.CrossRefGoogle Scholar - Aaberge, R., Colombino, U., Colombino, U., & Strøm, S. (1999). Labour supply in Italy: An empirical analysis of joint household decisions, with taxes and quantity constraints.
*Journal of Applied Econometrics*,*14*(4), 403–22.CrossRefGoogle Scholar - Aaberge, R., Colombino, U., Colombino, U., & Strøm, S. (2004). Do more equal slices shrink the cake? An empirical investigation of tax–transfer reform proposals in Italy.
*Journal of Population Economics*,*17*(4), 767–785.CrossRefGoogle Scholar - Bargain, O., Decoster, A., Dolls, M., Neumann, D., Peichl, A., & Siegloch, S. (2013). Welfare, labor supply and heterogeneous preferences: Evidence for Europe and the US.
*Social Choice and Welfare*,*41*(4), 789–817.CrossRefGoogle Scholar - Bargain, O., Decoster, A., Dolls, M., Neumann, D., Peichl, A., Siegloch, S., et al. (2016). Steady-state labor supply elasticities: An international comparison.
*IZA Journal of Labor Economics*,*5*(10), 1–31.Google Scholar - Bargain, O., Decoster, A., Dolls, M., Neumann, D., Peichl, A., Siegloch, S., et al. (2014). Labor supply elasticities in Europe and the US.
*Journal of Human Resources*,*49*(1), 723–838.Google Scholar - Bargain, O., Decoster, A., Dolls, M., Neumann, D., Peichl, A., Siegloch, S., et al. (2015). Tax policy and income inequality in the U.S., 1978–2007.
*Economic Inquiry*,*53*(2), 1061–1085.CrossRefGoogle Scholar - Blackorby, C., & Donaldson, D. (1988). Money-metric utility: A harmless normalization?
*Journal of Economic Theory*,*46*(1), 120–129.CrossRefGoogle Scholar - Blau, F. D., & Kahn, L. M. (2007). Changes in the labor supply behavior of married women: 1980–2000.
*Journal of Labor Economics*,*25*(3), 393–438.CrossRefGoogle Scholar - Blundell, R. (2001). Welfare reforms for low income workers.
*Oxford Economic Papers*,*53*(2), 189–214.CrossRefGoogle Scholar - Blundell, R., & Shephard, A. (2012). Employment, hours of work and the optimal taxation of low-income families.
*Review of Economic Studies*,*79*(2), 481–510.CrossRefGoogle Scholar - Blundell, R., & Macurdy, T. (1999). Labor supply: A review of alternative approaches. In O. Ashenfelter & D. Card (Eds.),
*Handbook of labor economics, volume 3*(pp. 1559–1695). Amsterdam: Elsevier. chapter 27.CrossRefGoogle Scholar - Burkhauser, R., Feng, S., Jenkins, S., & Larrimore, J. (2011). Trends in United States income inequality using the March Current Population Survey: The importance of controlling for censoring.
*Journal of Economic Inequality*,*9*(3), 393–415.CrossRefGoogle Scholar - Carpantier, J. F., & Sapata, C. (2016). Empirical welfare analysis: When preferences matter.
*Social Choice and Welfare*,*46*(3), 521–542.CrossRefGoogle Scholar - Creedy, J., & Hérault, N. (2015). Decomposing inequality changes: Allowing for leisure in the evaluation of tax and transfer policy effects.
*Fiscal Studies*,*36*(2), 157–180.CrossRefGoogle Scholar - Dagsvik, J. K., & Strøm, S. (2006). Sectoral labour supply, choice restrictions and functional form.
*Journal of Applied Econometrics*,*21*(6), 803–826.CrossRefGoogle Scholar - DeBacker, J., Heim, B., Panousi, V., Ramnath, S., & Vidangos, I. (2013). Rising inequality: Transitory or permanent? New evidence from a panel of U.S. tax returns. In
*Brookings papers on economics activity*(pp. 67–142). Spring.Google Scholar - Decoster, A. M. J., & Haan, P. (2015). Empirical welfare analysis with preference heterogeneity.
*International Tax and Public Finance*,*22*(2), 224–251.CrossRefGoogle Scholar - Dickert, S., Houser, S., & Scholz, J. K. (1995). The earned income tax credit and transfer programs: A study of labor market and program participation. In J. M. Poterba (Ed.),
*Tax policy and the economy, volume 9*(pp. 1–50). Cambridge: The MIT Press.**(Chapter 1)**.Google Scholar - Eissa, N., & Hoynes, H. W. (2004). Taxes and the labor market participation of married couples: The earned income tax credit.
*Journal of Public Economics*,*88*(9–10), 1931–1958.CrossRefGoogle Scholar - Eissa, N., Hoynes, H. W., & Liebman, J. B. (1996). Labor supply response to the earned income tax credit.
*Quarterly Journal of Economics*,*111*(2), 605–637.CrossRefGoogle Scholar - Eissa, N., Hoynes, H. W., Kleven, H. J., & Kreiner, C. T. (2008). Evaluation of four tax reforms in the United States: Labor supply and welfare effects for single mothers.
*Journal of Public Economics*,*92*(3–4), 795–816.CrossRefGoogle Scholar - Ellwood, D. (2000). The impact of the earned income tax credit and social policy reforms on work, marriage and living arrangements.
*National Tax Journal*,*53*(4), 1063–1105.CrossRefGoogle Scholar - Feenberg, D. R., & Coutts, E. (1993). An introduction to the TAXSIM model.
*Journal of Policy Analysis and Management*,*12*(1), 189–194.CrossRefGoogle Scholar - Fleurbaey, M. (2008).
*Fairness, responsibility and welfare*. New York: Oxford University Press.CrossRefGoogle Scholar - Fleurbaey, M., & Blanchet, D. (2013).
*Beyond GDP: Measuring welfare and assessing sustainability*. Oxford: Oxford University Press.CrossRefGoogle Scholar - Fleurbaey, M., & Maniquet, F. (2006). Fair income tax.
*Review of Economic Studies*,*73*(1), 55–83.CrossRefGoogle Scholar - Fleurbaey, M., & Maniquet, F. (2011).
*A theory of fairness and social welfare*. Cambridge: Cambridge University Press.CrossRefGoogle Scholar - Fleurbaey, M., & Maniquet, F. (2015). Optimal taxation theory and principles of fairness, 2015. In
*CORE discussion paper no. 2015/5*. Louvain-la-Neuve.Google Scholar - Fox, J. T., & Gandhi, A. (2016). Nonparametric identification and estimation of random coefficients in multinomial choice models.
*RAND Journal of Economics*,*47*(1), 118–139.CrossRefGoogle Scholar - Heathcote, J., Perri, F., & Violante, G. (2010). Unequal we stand: An empirical analysis of economic inequality in the United States, 1967–2006.
*Review of Economic Dynamics*,*12*(1), 15–51.CrossRefGoogle Scholar - Heckman, J. J., & Singer, B. (1984). A method for minimizing the impact of distributional assumptions in econometric models for duration data.
*Econometrica*,*52*(2), 271–320.CrossRefGoogle Scholar - Heim, B. T. (2009). Structural estimation of family labor supply with taxes: Estimating a continuous hours model using a direct utility specification.
*Journal of Human Resources*,*44*(2), 350–385.CrossRefGoogle Scholar - Hoynes, H. W. (1996). Welfare transfers in two-parent families: Labor supply and welfare participation under AFDC-UP.
*Econometrica*,*64*(2), 295–332.CrossRefGoogle Scholar - King, M. A. (1983). Welfare analysis of tax reforms using household data.
*Journal of Public Economics*,*21*(2), 183–214.CrossRefGoogle Scholar - McFadden, D., & Train, K. (2000). Mixed MNL models for discrete response.
*Journal of Applied Econometrics*,*15*(5), 447–470.CrossRefGoogle Scholar - Meier, B. D., & Rosenbaum, D. T. (2000). Making single mothers work: Recent tax and welfare policy and its effects.
*National Tax Journal*,*53*(4), 1027–1061.CrossRefGoogle Scholar - Meier, B. D., & Rosenbaum, D. T. (2001). Welfare, the earned income tax credit, and the labor supply of single mothers.
*Quarterly Journal of Economics*,*116*(3), 1063–1114.CrossRefGoogle Scholar - Mundlak, Y. (1978). On the pooling of time series and cross section data.
*Econometrica*,*46*(1), 69–85.CrossRefGoogle Scholar - Piketty, T., & Saez, E. (2003). Income inequality in the United States, 1913–1998.
*The Quarterly Journal of Economics*,*118*(1), 1–39.CrossRefGoogle Scholar - Piketty, T., & Saez, E. (2007). How progressive is the U.S. federal tax system? A historical and international perspective.
*Journal of Economics Perspectives*,*21*(1), 1–24.CrossRefGoogle Scholar - Scholz, J. K. (1996). In-work benefits in the United States: The earned income tax credit.
*Economic Journal*,*106*(434), 156–169.CrossRefGoogle Scholar - Stiglitz, J.E. (1987). Pareto efficient and optimal taxation and the new new welfare economics. In
*NBER Working Paper No. 2189*.Google Scholar - Triest, R. K. (1990). The effect of income taxation on labor supply in the United States.
*Journal of Human Resources*,*25*(3), 491–516.CrossRefGoogle Scholar - van den Berg, G. J., & Lindeboom, M. (1998). Attrition in panel survey data and the estimation of multi-state labor market models.
*Journal of Human Resources*,*33*(2), 458–478.CrossRefGoogle Scholar - van den Berg, G. J., Lindeboom, M., & Ridder, G. (1994). Attrition in longitudinal panel data and the empirical analysis of dynamic labour market behaviour.
*Journal of Applied Econometrics*,*9*(4), 421–35.CrossRefGoogle Scholar - van Soest, A. (1995). Structural models of family labor supply: A discrete choice approach.
*Journal of Human Resources*,*30*(1), 63–88.CrossRefGoogle Scholar - van Soest, A., Das, M., & Gong, X. (2002). A structural labour supply model with flexible preferences.
*Journal of Econometrics*,*107*(1–2), 345–374.CrossRefGoogle Scholar - Wooldridge, J. M. (1995). Selection corrections for panel data models under conditional mean independence assumptions.
*Journal of Econometrics*,*68*(1), 115–132.CrossRefGoogle Scholar - Wooldridge, J. M. (2010).
*Econometric analysis of cross section and panel data*. Cambridge: The MIT Press.Google Scholar