Should day care be subsidized?
AbstractIn an economy with distortionary taxes on labor, can subsidies on day care, financed by an increase in taxes, raise welfare by encouraging women with small children to work? We show, within a heterogeneous-agent life-cycle framework, that the Ramsey optimal policy consists in equalizing consumption/leisure wedges over the life cycle and across agents. A simple way to implement this is to make day care expenses tax deductible. Calibrating our model to Germany, we find that tax deductibility for day care expenses leads to an approximate doubling of labor supply for both married and single mothers with small children. The overall welfare gain from optimal reform corresponds to a 1.0 percent increase in consumption.
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Bibliographic InfoPaper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 0729.
Length: 43 pages
Date of creation: 11 Jun 2010
Date of revision:
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More information through EDIRC
Female labor force participation; Germany; day care subsidies;
Other versions of this item:
- E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
- J13 - Labor and Demographic Economics - - Demographic Economics - - - Fertility; Family Planning; Child Care; Children; Youth
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-07-03 (All new papers)
- NEP-DGE-2010-07-03 (Dynamic General Equilibrium)
- NEP-LAB-2010-07-03 (Labour Economics)
- NEP-MAC-2010-07-03 (Macroeconomics)
- NEP-REG-2010-07-03 (Regulation)
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