Tax Treatment and Inequality in Labor Market Behavior

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

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.

Related Published Papers

Author/sTitleYearProgram AreaKeywords
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
Back