Judith Herrmann - Income Tax Reforms as a Driver for Female Labor Supply?

• Presenting author: Judith Herrmann (Fraunhofer Institute for Applied Information Technology FIT)

• Authors: Judith Hermann

• Session: C03B - Behavior [2] - Wednesday 14:00-15:30 - Marietta-Blau Hall

• Slides: PDF

Compared to other industrialized countries, Germany still has a relatively low female labor supply. The income taxation scheme is often seen as an obstacle to increasing labor supply of married women. Whereas a transition from the joint income taxation of married couples to an individual taxation scheme is difficult due to constitutional reasons, there is easier scope for reforms of the withholding tax on employment income. We quantify possible labor supply effects of such a reform, using a structural discrete choice labor supply model. We investigate how different assumptions about couples’ decisionmaking influence estimated reform effects. The standard approach, assuming a joint utility function that is maximized with respect to household income, results in minimal labor supply reactions and likely underestimates potential effects. We test alternative assumptions about the role of individual incomes in the utility function and show that increases are limited to about three percent of hours worked even in the most optimistic scenario. Our paper provides important insights for analyses estimating labor supply responses to reforms that differentially affect primary and secondary earners’ incomes.