LABOR SUPPLY, COMMODITY DEMAND AND MARGINAL TAX-REFORM

This paper examines the implications of extending the Ahmad-Stern model of indirect tax reform to include labour supply. The inclusion of labour supply alters the basic measure of marginal revenue cost (MRC) of indirect taxation and introduces the possibility of calculating a MRC for direct taxation. The paper derives the expressions for these revised MRCs and provides estimates from Irish data. It then examines the sensitivity of the results to assumptions regarding functional form and, in particular, goods/leisure separability.