Tax Treatment and Inequality in Labor Market Behavior

Project Start:01/2016
Researchers:Nicola Fuchs-Schündeln, Hannah Paule-Paludkiewicz, Paul Reimers
Area: Household Finance, Macro Finance
Funded by:LOEWE

This project was part of the team project "Household Heterogeneity, Financial Frictions and Inequality "


Topic and Objectives


In many European countries, increasing female labor supply is an explicit policy goal, e.g. to alleviate financial pressure on public social security systems caused by demographic change. At the same time, the stagnating female labor force participation has become a point of discussion in the US. A large range of policies explicitly aim at establishing equal labor market opportunities across the two genders and increasing female labor supply, e.g. subsidized child care, maternity leave, and part-time regulation. However, one policy instrument that heavily influences labor supply in general is largely neglected in this debate, namely income taxation. Income taxes can influence the labor supply of both spouses in a married couple differentially through elements of joint taxation. While in a system of separate taxation each spouse’s marginal tax rate increases only in the own income, in systems of joint taxation one spouse’s marginal tax rate increases not only in the own income, but also in the spousal income. 

Relying on a calibrated macro model), we quantify the disincentive effects of elements of joint taxation in 17 European countries and the US on the labor supply of married couples. Specifically, we investigate how hours of married couples would change if each country moved from the current system of taxation to a system of separate taxation. Generally, in a tax system featuring joint taxation and progressivity, the marginal tax rate of the primary earner (i.e. in most cases the husband) is lower than the one of a single earning the same income, and the marginal tax rate of the secondary earner (i.e. in most cases the wife) is higher than the one of a single with the same income. Thus, when a country with some elements of joint taxation moves from the current tax system to a system of completely separate taxation of married couples in our hypothetical tax reform, hours worked of the secondary earner increase, as long as the tax code features progressivity. Importantly, in our quantitative analysis, we keep the government revenues collected from married households constant, and only change marginal tax rates. The results of our analysis thus give a comparative quantitative measure of how strong the effects of joint taxation are in each of our sample countries, leaving the average tax burden of married households unchanged.


Key Findings

  • In general, moving from the current system of taxation to a system of strictly separate taxation marginally lowers the labor supply of married men, but substantially increases the labor supply of married women.
  • Four countries, namely Greece, Hungary, Sweden, and the UK, already feature systems of separate taxation.
  • With the exception of these four countries, the model predicts that moving from the current tax system to separate taxation increases hours worked by married women on average by 115 hours, or 10.5%, and decreases male hours by 18 hours, thus leading to an average increase of married couples’ total hours of 97 hours annually.
  • The disincentive effects on the labor supply of married women coming from elements of joint taxation are especially large in Germany and Belgium. 
  • The elements of joint taxation constitute a larger disincentive for the labor supply of married women than the progressivity of the tax system itself, except for the four countries with separate taxation and Austria.


Policy Implications 

Removing elements of joint taxation from the tax code is a promising policy tool for increasing the labor supply of married women.

Related Published Papers

Alexander Bick, Nicola Fuchs-SchündelnQuantifying the Disincentive Effects of Joint Taxation on Married Women’s Labor Supply
American Economic Review: Papers & Proceedings
2017 Household Finance, Macro Finance Tax Law, Fiscal Policies, Behavior of Economic Agents, Household