1 Taxes and Time Allocation : Evidence from Single Women and Men

The classic model of Becker (1965) suggests that labor supply decisions should be analyzed within the broader context of time allocation and market good consumption choices, but most empirical work on policy has focused exclusively on measuring impacts on market work. This paper examines how income taxes affect time allocation during the entire day, and how these time allocation decisions interact with expenditure patterns. Using the Panel Study of Income Dynamics from 1975 to 2004, we analyze the response of single women's housework, labor supply, and other time to variation in tax and transfer schedules across income levels, number of children, states, and time. We find that when the economic reward to participating in the labor force increases, market work increases and housework decreases, with the decrease in housework accounting for approximately two-thirds of the increase in market work. Analysis of repeated cross-sections of time diary data from 1975 to 2004 shows that "home production" decreases substantially when market hours of work increase in response to policy changes. Data on expenditures show some evidence that expenditures on market goods likely to substitute for housework increase in response to a greater incentive to join the labor force. The baseline estimates imply that the elasticity of substitution between consumption of home and market goods is 2.61. The results are consistent with the Becker model. Meanwhile, single men show little response to changes in tax policy, and we are able to rule out an elasticity of substitution between home and market goods for this group of more than 1.66. * We thank Raj Chetty, David Cutler, Daniel Hamermesh, Hilary Hoynes, Erik Hurst, Damon Jones, Lawrence Katz, Louis Kaplow, Bruce Meyer, Claudia Olivetti, Imran Rasul, Daniel Sacks, Karl Scholz, Daniel Silverman, Todd Sinai, Justin Wolfers, Maisy Wong, three anonymous referees, and numerous seminar participants for suggestions. We are grateful to Adam Looney, Bruce Meyer, and Mel Stephens for generously sharing data. We are also grateful to Mark Aguiar and Erik Hurst for making their data and code available on the web. Daniel Sacks provided outstanding research assistance. Gelber acknowledges financial support from the National Institute on Aging, Grant Number T32-AG00186, as well as the Center for Human Resources, the Mack Center, the Risk and Decision Processes Center, and the Zicklin Center, all at Wharton. Mitchell acknowledges generous support from the NSFIGERT program, "Multidisciplinary Program in Inequality & Social Policy" at Harvard University (Grant No. 0333403). All errors are our own. Email: [email protected].