LABOR SUPPLY, TAXES, AND GOVERNMENT SPENDING - A MICROECONOMETRIC ANALYSIS

The effect of government spending on labor supply behavior is critical to predicting the balanced-budget effect of income taxes and to estim ating the marginal social cost of public funds. Yet, its very existenc e, not to mention direction and magnitude, has not been empirically in vestigated. This research estimates a labor supply function that incor porates income taxation and government spending using microeconomic da ta for men and women. The empirical results suggest that public sector spending may have a significant effect on labor supply, thereby leadi ng to estimates of the marginal social cost of public funds that diffe r from those typically calculated.