Mirrlees, James A., 1971. “An Exploration in the Theory of Optimum Income Taxation,” Review of Economic Studies, 38(2), 175–208.
Calculations for benefit levels do not include unemployment benefits as the focus of the analysis is on the decision to join the labor force, rather than involuntary unemployment. Benefit levels are simple averages across the usual family types presented by the OECD, which include single and married, with and without 2 children (OECD 2018).
We set the hours (intensive) elasticity at 0.10 and the average participation (extensive) elasticity at 0.20 for the baseline calibration. Robustness checks use lower (0.05 and 0.1) and higher (0.2 and 0.3) elasticities. Economic Policy Council Report 2015 provides a review of recent empirical studies for Finland.
This distribution is imputed for current non-workers using employment rates by educational attainment, which varies between 80 percent for those with primary school to 97 percent for doctoral graduates. The average employment rate in the sample is 89 percent. We exclude retirees, students and the disabled. We also drop mothers of children aged less than one.
The METR includes consumption taxes. We use the ratio of indirect tax revenues to private consumption, which was 26.6 percent in 2018.
Under alternative calibrations, all weights are positive with lower labor supply elasticities (0.05 for the intensive and 0.10 for the extensive margin), while the top 30 percent has negative weights with higher elasticities (0.2 and 0.3). For further discussion on the revenue-maximizing rate, see Economic Policy Council Report 2015 and Lundberg 2017.
A CRIA function means society values the additional consumption of two individuals only according to their relative income levels. For individuals at the 10th and 90th percentiles of the income distribution in Finland, this is calculated as
This would still imply lower inequality than in Sweden, for instance.