To Work or Not to Work: Did Tax Reforms Affect Labor Force Participation of Married Couples?
During the period 1960-2000, the proportion of two-earner couples among married couples in the U.S. more than doubled, while tax laws underwent numerous changes, with major reforms taking place in the 1980's (flattening of the federal income tax schedule) and in the 1990's (major expansion of the Earned Income Tax Credit (EITC)). We investigate the impact of the actual tax reforms on married couples' participation through a model of heterogeneous households. Theoretically, we elucidate what aspects of the tax reforms are important for a family time allocation choice when the work choice is discrete. Quantitatively, we show that even in the 1980's, changes in tax laws account for only 8% of the increase in the proportion of two-earner couples, although this small average impact masks a much larger impact experienced by women with high earning husbands. Another important finding is that the Earned Income Tax Credit substantially discourages work participation among married couples with low-earning husbands. A notable contribution of this work is the accurate incorporation of the complex U.S. tax code into a model of heterogeneous households, which is done using TAXSIM, a tax calculator software.
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Volume (Year): 9 (2009)
Issue (Month): 1 (July)
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