Quantifying the Disincentive Effects of Joint Taxation on Married Women’s Labor Supply

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 (Blau and Kahn, 2013). 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. One variant of such a system is e.g. in place in the US. Eissa (1995, 1996) analyzes two tax reform acts in the US in the 1980s that significantly reduced the top marginal income tax rates. In a difference-in-differences setting, she finds that these reforms led to an increase in the labor supply of women married to high-earning husbands.