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May 24, 2017

Separate and more equal?

Systems that tax married couple's income jointly may give the secondary earner (usually the wife) less incentive to work.

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The United States and many countries in Europe have become increasingly concerned with getting more women to work at a time when female labor force participation is stagnating.

Subsidizing child care and paid maternity leave are just a couple of the ideas that policy makers have considered. But to what extent can income taxes encourage more women to join the workforce?

Researchers Alexander Bick and Nicola Fuchs-Schündeln explore this question in an article that appears this month in the AER’s Papers & Proceedings issue. Specifically, they looked at how joint taxation — in which a married couple’s income is taxed together — affects the spouses differently when it comes to their incentives to work.

In this system, the marginal tax rate that a person pays increases not only with bumps in their own income, but also in their spouse’s income. This contrasts with a system of separate taxation, where each spouse’s marginal tax rate varies only with their own income, or put differently, it is independent of whether one is married or single.     

Generally, joint taxation works to the benefit of the primary earner (usually men), as they pay a lower marginal tax rate than a single person earning the same income. However, the tax rate on the secondary earner (usually the wife) is higher than their single counterpart.

In other words, married men fare better than their single peers. Married women? Not so much.

Figure 2 from Bick and Fuchs-Schundeln (2017)

The chart above, taken from Figure 2, shows what might happen in a sample of 18 countries to the hours that men and women work if those countries moved to a system that taxed married couples separately, keeping the average tax burden on married households constant. In the United States, for example, women would work 113 more hours every year, a gain of 7.8 percent. Meanwhile, the hours worked by men would decline slightly. By far, the largest changes would be in Germany and Belgium. Women in those two countries would increase their hours worked by 280 and 340, respectively. Greece, Hungary, Sweden, and the UK have separate taxation.