Maurizio Mazzocco (UCLA) (webinar)

“Taxation and Household Decisions: an Intertemporal Analysis”

Abstract: How do different income taxation systems – for instance individual vs. joint – affect people’s decisions and welfare? We provide an answer to this question in three steps. We document that taxing married households jointly, as in the U.S., generates substantial disincentives for secondary earners to supply labor, and that secondary earners respond to these disincentives. Next, we develop a lifecycle model in which single and married individuals make decisions about labor supply, household production, human capital accumulation, consumption, savings, marriage, and divorce. We estimate the model using variation from past tax reforms in the U.S., as well as auxiliary time use and expenditure data. Lastly, we use the model to evaluate the effect of three sets of tax and transfer policies on individual decisions and welfare. We first analyze policies that reduce tax rates on secondary earner’s income. We then study alternative systems for determining eligibility of married households for means-tested programs. Finally, we evaluate the interaction between income taxation and government programs designed to increase female labor supply, such as child care subsidies. We find that both individual taxation and secondary earner deductions are on average welfare-improving, with substantial effects on female labor supply, human capital accumulation, intra-household specialization, and marital sorting based on earnings potential. When studying eligibility for means-tested programs, we find that secondary earner deductions generate overall welfare improvements, and are preferred over individual treatment of income for program eligibility. Lastly, we find that childcare subsidies are about 30% more effective in increasing female labor supply under an individual tax system, indicating that there is substantial scope for improving tax and transfer efficiency in countries that have implemented policies targeting female labor supply.

Joint with: Mary Ann Bronson.