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Reforming Family Taxation in Germany: Labor Supply vs. Insurance Effects

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  • Hans Fehr
  • Manuel Kallweit
  • Fabian Kindermann

Abstract

The present paper quantifies the economic consequences of eliminating the system of income splitting in Germany. We apply a dynamic simulation model with overlapping generations where single and married agents have to decide on labor supply and homework facing income and lifespan risk. The numerical exercise computes the resulting welfare changes across households and isolates aggregate efficiency effects of a move towards either individual taxation or family splitting. Our results indicate strongly that a switch towards individual taxation performs best in terms of economic efficiency due to reduced labor market distortions and improved insurance provision. In our benchmark calibration the efficiency gain amounts to roughly 0.4 percent of aggregate resources. Excluding home production significantly reduces aggregate efficiency gains while including marital risk slightly improves the efficiency of individual taxation.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.434125.de/diw_sp0613.pdf
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Bibliographic Info

Paper provided by DIW Berlin, The German Socio-Economic Panel (SOEP) in its series SOEPpapers on Multidisciplinary Panel Data Research with number 613.

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Length: 33 p.
Date of creation: 2013
Date of revision:
Handle: RePEc:diw:diwsop:diw_sp613

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Keywords: Stochastic general equilibrium; home production; female labor supply; tax unit choice; insurance provision;

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