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Tax Incentives and Family Labor Supply in Austria

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Abstract

This paper approaches the question whether and to what extent a policy shift from universal child transfers towards child tax deductibles is capable of activating (mostly female) unused labor market potential in Austria. We develop a discrete choice labor supply model based on the EU-SILC datasets 2004-2010 and present static uncompensated own and cross wage elasticities at the intensive and extensive margins. We find that the family policy reform 2009 had only small employment effects, most of them being generated through the introduction of a child care deductible. To illustrate the employment potential of a shift from transfers to tax deductibles we propose several simulations showing that such a policy shift would yield an increase in full time equivalents of approximately 1.3% overall, with females in couples increasing their labor supply by up to 3.9%. Although the proposed policy shifts have highly regressive effects in terms of their impact on the distribution of disposable income, we show that phasing-out the tax deductible at higher income allows, in principle, for the compensation of lower-income households without jeopardizing positive employment effects.

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Bibliographic Info

Paper provided by The Austrian Center for Labor Economics and the Analysis of the Welfare State, Johannes Kepler University Linz, Austria in its series NRN working papers with number 2012-12.

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Length: 28 pages
Date of creation: Nov 2012
Date of revision:
Handle: RePEc:jku:nrnwps:2012_12

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Postal: NRN Labor Economics and the Welfare State, c/o Rudolf Winter-Ebmer, Altenbergerstr. 69, 4040 Linz
Phone: +43-732-2468-8216
Fax: +43-732-2468-8217
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Web page: http://www.labornrn.at/
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Related research

Keywords: Labor Supply; Discrete Choice; Income Taxation; Family Policy;

References

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  1. Helene Dearing & Helmut Hofer & Christine Lietz & Rudolf Winter-Ebmer & Katharina Wrohlich, 2007. "Why are mothers working longer hours in Austria than in Germany? A comparative micro simulation analysis," Economics working papers 2007-11, Department of Economics, Johannes Kepler University Linz, Austria.
  2. Bargain, Olivier & Orsini, Kristian, 2006. "In-work policies in Europe: Killing two birds with one stone?," Labour Economics, Elsevier, vol. 13(6), pages 667-697, December.
  3. Peichl, Andreas & Schneider, Hilmar & Siegloch, Sebastian, 2010. "Documentation IZAΨMOD: The IZA Policy SImulation MODel," IZA Discussion Papers 4865, Institute for the Study of Labor (IZA).
  4. Richard Blundell & Alan Duncan & Costas Meghir, 1998. "Estimating Labor Supply Responses Using Tax Reforms," Econometrica, Econometric Society, vol. 66(4), pages 827-862, July.
  5. Eissa, Nada & Hoynes, Hilary Williamson, 2004. "Taxes and the labor market participation of married couples: the earned income tax credit," Journal of Public Economics, Elsevier, vol. 88(9-10), pages 1931-1958, August.
  6. Train,Kenneth E., 2009. "Discrete Choice Methods with Simulation," Cambridge Books, Cambridge University Press, number 9780521766555, April.
  7. Hoynes, Hilary Williamson, 1996. "Welfare Transfers in Two-Parent Families: Labor Supply and Welfare Participation under AFDC-UP," Econometrica, Econometric Society, vol. 64(2), pages 295-332, March.
  8. Raj Chetty & Adam Guren & Day Manoli & Andrea Weber, 2012. "Does Indivisible Labor Explain the Difference between Micro and Macro Elasticities? A Meta-Analysis of Extensive Margin Elasticities," NBER Chapters, in: NBER Macroeconomics Annual 2012, Volume 27, pages 1-56 National Bureau of Economic Research, Inc.
  9. Chiappori, P.A., 1989. "Collective Labour Supply and Welfare," DELTA Working Papers 89-07, DELTA (Ecole normale supérieure).
  10. Hans G. Bloemen, 2010. "Income Taxation in an Empirical Collective Household Labour Supply Model with Discrete Hours," Tinbergen Institute Discussion Papers 10-010/3, Tinbergen Institute.
  11. Olivier Donni & Nicolas Moreau, 2007. "Collective Labor Supply: A Single-Equation Model and Some Evidence from French Data," Journal of Human Resources, University of Wisconsin Press, vol. 42(1).
  12. Bruce D. Meyer & Dan T. Rosenbaum, 2001. "Welfare, The Earned Income Tax Credit, And The Labor Supply Of Single Mothers," The Quarterly Journal of Economics, MIT Press, vol. 116(3), pages 1063-1114, August.
  13. N. Gregory Mankiw & Matthew Weinzierl & Danny Yagan, 2009. "Optimal Taxation in Theory and Practice," Journal of Economic Perspectives, American Economic Association, vol. 23(4), pages 147-74, Fall.
  14. Viktor Steiner & Katharina Wrohlich, 2004. "Household Taxation, Income Splitting and Labor Supply Incentives: A Microsimulation Study for Germany," Discussion Papers of DIW Berlin 421, DIW Berlin, German Institute for Economic Research.
  15. Georg Wernhart & Rudolf Winter-Ebmer, 2008. "Do Austrian Men and Women Become more Equal? At Least in Terms of Labor Supply!," Economics working papers 2008-05, Department of Economics, Johannes Kepler University Linz, Austria.
  16. Creedy, John & Duncan, Alan, 2002. " Behavioural Microsimulation with Labour Supply Responses," Journal of Economic Surveys, Wiley Blackwell, vol. 16(1), pages 1-39, February.
  17. Olivier Donni, 2001. "Collective Female Labor Supply: Theory and Application," Cahiers de recherche CREFE / CREFE Working Papers 141, CREFE, Université du Québec à Montréal.
  18. Peter A. Diamond & Emmanuel Saez, 2011. "The Case for a Progressive Tax: From Basic Research to Policy Recommendations," CESifo Working Paper Series 3548, CESifo Group Munich.
  19. Del Boca, Daniela & Sauer, Robert M., 2009. "Life cycle employment and fertility across institutional environments," European Economic Review, Elsevier, vol. 53(3), pages 274-292, April.
  20. Bargain, Olivier & Orsini, Kristian & Peichl, Andreas, 2011. "Labor Supply Elasticities in Europe and the US," IZA Discussion Papers 5820, Institute for the Study of Labor (IZA).
  21. Mike Brewer & Anita Ratcliffe & Sarah dSmith, 2012. "Does welfare reform affect fertility? Evidence from the UK," Journal of Population Economics, Springer, vol. 25(1), pages 245-266, January.
  22. Kristian Orsini, 2006. "Tax-benefits reforms and the labor market: evidence from Belgium and other EU countries," Center for Economic Studies - Discussion papers ces0606, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  23. Richard Blundell & Alan Duncan & Julian McCrae & Costas Meghir, 2000. "The labour market impact of the working families’ tax credit," Fiscal Studies, Institute for Fiscal Studies, vol. 21(1), pages 75-103, March.
  24. Brewer, Mike & Duncan, Alan & Shephard, Andrew & Suarez, Maria Jose, 2006. "Did working families' tax credit work? The impact of in-work support on labour supply in Great Britain," Labour Economics, Elsevier, vol. 13(6), pages 699-720, December.
  25. Chiappori, Pierre-André & Donni, Olivier, 2009. "Non-unitary Models of Household Behavior: A Survey of the Literature," IZA Discussion Papers 4603, Institute for the Study of Labor (IZA).
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