Labor Income Tax and Output: A Structural VAR Analysis

  • Sanjib Sarker
  • Basudeb Biswas
  • Peter J. Saunders

Abstract

This paper analyzes two channels through which a change in labor income tax may affect output. First, a tax cut provides higher work incentives, thereby increasing the aggregate output through an increase in the aggregate labor supply. Second, a tax-cut increases disposable income and the aggregate demand. An increase in the aggregate demand leads to a higher level of aggregate output. The first channel is believed to have a permanent effect on output movements, while the latter has only a temporary effect. This paper captures these two effects by defining two disturbances on the basis of the existing economic theory.

Published
2014-07-01
How to Cite
SARKER, Sanjib; BISWAS, Basudeb; SAUNDERS, Peter J.. Labor Income Tax and Output: A Structural VAR Analysis. The Journal of Business Inquiry, [S.l.], v. 13, n. 2, p. 105-131, july 2014. ISSN 2155-4072. Available at: <https://journals.uvu.edu/index.php/jbi/article/view/95>. Date accessed: 26 june 2022.