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To Work or Not to Work: Did Tax Reforms Affect Labor Force Participation of Married Couples?

Listed author(s):
  • Bar Michael

    ()

    (San Francisco State University)

  • Leukhina Oksana

    ()

    (University of North Carolina at Chapel Hill)

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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Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 9 (2009)
Issue (Month): 1 (July)
Pages: 1-30

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Handle: RePEc:bpj:bejmac:v:9:y:2009:i:1:n:28
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  1. Jerry A. Hausman & James M. Poterba, 1986. "Household Behavior and the Tax Reform Act of 1986," Working papers 437, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. James M. Poterba (ed.), 1993. "Tax Policy and the Economy, Volume 7," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262660814.
  3. Bruce D. Meyer & Dan T. Rosenbaum, 1998. "Welfare, the Earned Income Tax Credit, and the Labor Supply of Single Mothers," JCPR Working Papers 32, Northwestern University/University of Chicago Joint Center for Poverty Research.
  4. 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.
  5. Nada Eissa, 1995. "Taxation and Labor Supply of Married Women: The Tax Reform Act of 1986 as a Natural Experiment," NBER Working Papers 5023, National Bureau of Economic Research, Inc.
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  7. Edward C. Prescott, 2003. "Why do Americans work so much more than Europeans?," Staff Report 321, Federal Reserve Bank of Minneapolis.
  8. Barry Bosworth & Gary Burtless, 1992. "Effects of Tax Reform on Labor Supply, Investment, and Saving," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 3-25, Winter.
  9. Feldstein, Martin, 1995. "Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Scholarly Articles 2766676, Harvard University Department of Economics.
  10. Daniel Feenberg & Elisabeth Coutts, 1993. "An introduction to the TAXSIM model," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 12(1), pages 189-194.
  11. Lindsey, Lawrence B., 1987. "Individual taxpayer response to tax cuts: 1982-1984 : With implications for the revenue maximizing tax rate," Journal of Public Economics, Elsevier, vol. 33(2), pages 173-206, July.
  12. Dora L. Costa, 2000. "From Mill Town to Board Room: The Rise of Women's Paid Labor," NBER Working Papers 7608, National Bureau of Economic Research, Inc.
  13. Goldin, Claudia, 1992. "Understanding the Gender Gap: An Economic History of American Women," OUP Catalogue, Oxford University Press, number 9780195072709, December.
  14. Nada Eissa & Jeffrey B. Liebman, 1996. "Labor Supply Response to the Earned Income Tax Credit," The Quarterly Journal of Economics, Oxford University Press, vol. 111(2), pages 605-637.
  15. Lawrence F. Katz & Kevin M. Murphy, 1991. "Changes in Relative Wages, 1963-1987: Supply and Demand Factors," NBER Working Papers 3927, National Bureau of Economic Research, Inc.
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