Income taxation and dual job labour supply among male workers in the UK

This paper examines the effects of increasing marginal tax rates on labour supply in a setting in which workers may hold two jobs and may be constrained in their weekly hours on their main job. A panel data, multi-equation labour supply model is estimated with correction for tax system endogeneity and multi-sample selection in a correlated random effects framework. Data come from the British Household Panel Survey. The effects of counterfactual increases in marginal tax rates are obtained from Gauss-Seidel simulations of labour supply embedded in a tax system with allowances, tax credits, and child benefits. Overall labour supply is reduced at the intensive and extensive margins with reductions in labour force participation and dual job holding. Results for low-income workers are relatively attenuated as earnings losses and work-based tax credits make reduced hours and labour force withdrawals highly unattractive options.