to F. Thomas Juster for help in designing the survey instrument, to Robert Barsky for collaboration in the early stage of this project, and to John Bound and Gary Solon for important

We are very grateful to the Smith-Richardson Foundation and Boston University for research support. The views expressed here are those of the authors and not those of their affiliated U.S. demographic projections portend dramatic increases in payroll taxes to finance old age transfer programs. But this scenario ignores the potential for capital deepening associated with population aging. More capital per worker would raise wage rates and limit the required rise in tax rates. Yet capital deepening is not guaranteed since a rising payroll tax will itself reduce capital formation. This study develops a dynamic general equilibrium life-cycle simulation model to study these conflicting forces using a model that admits realistic patterns of fertility and lifespan extension. It also features heterogeneity, both within and across generations. Unfortunately, under current policy, capital deepening does not occur, leading to deteriorating macroeconomic conditions that exacerbate our fiscal problems. Real wages fall 4 percent over the next 30 years and 10 percent over the century. And payroll and income tax hikes ultimately raise total taxes on labor income by 44 percent. Is there a painless way out of our demographic dilemma? No. A much faster rate of technical progress would help, but still leave a major problem. Getting workers to retire later in life would increase aggregate labor supply, but reduce aggregate capital formation. And cutting Social Security benefits either directly or by raising the program’s retirement age renders major welfare losses on current or near term retirees. However, advance funding the receipt of retirement income, while not being a free lunch, more evenly spreads the pain across generations: it entails moderate pain for living generations and provides major gains for future generations, particularly those with very low incomes. I.

This paper uses a new, large-scale, dynamic life-cycle simulation model to compare the welfare and macroeconomic effects of transitions to five fundamental alternatives to the U.S. federal income tax, including a proportional consumption tax and a flat tax. The model incorporates intragenerational heterogeneity and a detailed specification of alternative tax systems. Simulation results project significant long-run increases in output for some reforms. For other reforms, namely those that seek to insulate the poor and initial older generations from adverse welfare changes, long-run output gains are modest. (JEL H20, C68) Fundamental tax reform has been a hot issue, and for good reason. The U.S. tax system — a hybrid of income- and consumption-tax provisions — is complex, distortionary, and replete with tax preferences. Recent “reforms ” of the tax code, including the Taxpayer Relief Act of 1997, have made the system even more complex and buttressed the argument for fundamental reform. “Fundamental tax reform ” means different things to different people. The definition adopted below is the simplification and integration of the tax code by eliminating tax preferences and taxing all sources of capital income at the same rate. Several current tax proposals certainly deserve to be called “fundamental. ” They include Robert Hall and Alvin Rabushka’s (1983, 1995) flat tax, the retail sales tax, and David Bradford’s (1986) X tax. The flat tax and the retail sales tax are two alternative ways of taxing consumption. The X tax also taxes consumption, but The views expressed here are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Cleveland, the IMF, or any other organization. We are grateful to Cristina DeNardi, Barbara Fried,

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Abstract A variety of studies of intertemporal movements in wages and work effort are reviewed. I add new evidence and conclude that the evidence overwhelmingly indicates that workers are quite willing to intertemporally substitute labor supply and that too many economists have placed too much weight on the several problematic econometric studies that have utilized the PSID. The fundamental flaw in most previous studies is a failure to distinguish anticipated wage changes from those that are unanticipated or are artifacts of measurement error. Evidence for the kinds of intertemporal nonseparabilities advocated in the real business cycle literature is shown to be weak.

In the simple framework of a static model for equilibrium wages and labour supplies, we show that the incidence of income tax on equilibrium wages can be measured independently from the individual labour supply elasticity. This extends recent work by Blundell, Duncan and Meghir (1998) and Eissa and Liebman (1996), who estimate labour supply elasticities, and Gruber (1997), who estimates tax incidence on earnings. Our measurements are based on a large multi-level longitudinal data set of Danish private sector establishments and workers. We show that, allowing for labour supply response, there is strong evidence for partial shifting of the burden of income tax from worker to employer. Higher marginal tax rates are associated with increases in gross wages and earnings.

We propose a new econometric estimation method for analyzing the probability of leaving unemployment using uncompleted spells from repeated cross-section data, which can be especially useful when panel data are not available. The proposed method-of-moments-based estimator has two important features: (1) it estimates the exit probability at the individual level and (2) it does not rely on the stationarity assumption of the in‡ow composition. We illustrate and gauge the performance of the proposed estimator using Spanish Labor Force Survey data, and analyze the changes in distribution of unemployment between the 1980s and 1990s during a period of labor market reform. We …nd that the relative probability of leaving unemployment for the short-term unemployed compared to the long-term unemployed becomes signi…cantly higher in the 1990s.

We consider the impact of Tax credits and income support programs on female education choice, employment, hours and human capital accumulation over the life-cycle. We thus analyze both the short run incentive effects and the longer run implications of such programs. By allowing for risk aversion and savings we are also able to quantify the insurance value of alternative programs. We find important incentive effects on education choice, and labor supply, with single mothers having the most elastic labor supply. Returns to labour market experience are found to be substantial but only for full-time employment, and especially for women with more than basic formal education. For those with lower education the welfare programs are shown to have substantial insurance value. Based on the model marginal increases to tax credits are preferred to equally costly increases in income support and to tax cuts, except by those in the highest education group. Acknowledgements: Previously circulated as “The long-term effects of in-work benefits in a lifecycle model for policy evaluation”. This research has greatly benefited from discussions with Joe Altonji, Mike Brewer, David Card, Jim Heckman, Enrico Moretti and Hamish Low. We are also grateful to participants at the European Economic Association Summer Meetings, the IZA/SOLE transatlantic meeting and seminars at Yale

Abstract This paper presents a life-cycle model of woman's labour supply, human capital formation and savings for the evaluation of welfare-to-work and tax policies. Women's decisions are formalised in a dynamic and uncertain environment. The model includes a detailed characterisation of the tax system and of the dynamics of family formation while explicitly considering the determinants of employment and education decisions: (i ) contemporaneous incentives to work, (ii ) future consequences for employment through human capital accumulation and (iii ) anticipatory effects on the value of employment and education. The choice of parameters follows a careful calibration procedure, based of a large sample of data moments from the British population during the nineties using BHPS data. Many important features established in the empirical literature are reproduced in the simulation exercises, including the employment effects of the WFTC reform in the UK. The model is used to gain further insight into the responses to two recent policy changes, the October 1999 WFTC and the April 2003 WTC/CTC reforms. We find small but non-negligible anticipation effects on employment and education. Acknowledgements: This research has greatly benefited from discussions with Mike Brewer, Jim Heckman and Hamish Low. We have also benefited from the opportunity to present this work at

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