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Childcare Assistance: Are Subsidies or Tax Credits Better?

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  • Xiaodong Gong
  • Robert Breunig

Abstract

We evaluate price subsidies and tax credits for child care. We focus on partnered women's labor supply, household income and welfare, demand for formal and informal child care and government expenditure. Using Australian data, we estimate a joint, discrete structural model of labor supply and child care demand. We introduce two methodological innovations: a quantity constraint that total formal and informal child care hours is at least as large as the mother's labor supply and child care explicitly included in the utility function as a proxy for child development. We find that tax credits are better than subsidies in terms of increasing average hours worked and household income. However, tax credits disproportionately benefit wealthier and more educated women. Price subsidies, while less efficient, have positive re-distributional effects.
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Suggested Citation

  • Xiaodong Gong & Robert Breunig, 2017. "Childcare Assistance: Are Subsidies or Tax Credits Better?," Fiscal Studies, Institute for Fiscal Studies, vol. 38, pages 7-48, March.
    • Handle: RePEc:ifs:fistud:v:38:y:2017:i::p:7-48
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    Cited by:

    1. Thoresen, Thor O. & Vattø, Trine E., 2019. "An up-to-date joint labor supply and child care choice model," European Economic Review, Elsevier, vol. 112(C), pages 51-73.
    2. Lina Cardona-Sosa & Leonardo Morales, 2015. "Efectos laborales de los servicios de cuidado infantil: evidencia del programa Buen Comienzo," Borradores de Economia 12787, Banco de la Republica.
    3. Trine Engh Vattø & Kjersti Misje Østbakken, 2024. "Do means-tested childcare subsidies discourage work?," Journal of Population Economics, Springer;European Society for Population Economics, vol. 37(1), pages 1-31, March.
    4. de Boer, Henk-Wim & Jongen, Egbert L.W. & Kabatek, Jan, 2022. "The effectiveness of fiscal stimuli for working parents," Labour Economics, Elsevier, vol. 76(C).
    5. Xiaodong Gong & Robert Breunig, 2014. "Channels of labour supply responses of lone parents to changed work incentives," Oxford Economic Papers, Oxford University Press, vol. 66(4), pages 916-939.
    6. Darapheak Tin & Chung Tran, 2024. "Child-Related Transfers, Means Testing and Welfare," ANU Working Papers in Economics and Econometrics 2024-701, Australian National University, College of Business and Economics, School of Economics.
    7. Hassani Nezhad, Lena, 2020. "Female Employment and Childcare," IZA Discussion Papers 13839, Institute of Labor Economics (IZA).
    8. Michael Christl & Silvia De Poli & Janos Varga, 2022. "Reducing the income tax burden for households with children: an assessment of the child tax credit reform in Austria," Fiscal Studies, John Wiley & Sons, vol. 43(2), pages 151-177, June.
    9. Henk-Wim de Boer & Egbert Jongen & Jan Kabatek, 2014. "The effectiveness of fiscal stimuli for working parents," CPB Discussion Paper 286.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    10. Kabátek, Jan, 2015. "Essays on public policy and household decision making," Other publications TiSEM 8cdb178e-ad98-42e5-a7e1-b, Tilburg University, School of Economics and Management.
    11. Karen Mumford & Antonia Parera‐Nicolau & Yolanda Pena‐Boquete, 2020. "Labour Supply and Childcare: Allowing Both Parents to Choose," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 82(3), pages 577-602, June.
    12. O’Leary, Nigel & Li, Ian W. & Gupta, Prashant & Blackaby, David, 2020. "Wellbeing trajectories around life events in Australia," Economic Modelling, Elsevier, vol. 93(C), pages 499-509.

    More about this item

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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