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Reforming Family Taxation in Germany - Labor Supply vs. Insurance Effects

  • Hans Fehr
  • Manuel Kallweit
  • Fabian Kindermann

The present paper quantifies the economic consequences of eliminating the system of income splitting in Germany. We apply a dynamic simulation model with overlapping generations where single and married agents have to decide on labor supply and homework facing income and lifespan risk. The numerical exercise computes the resulting welfare changes across households and isolates aggregate efficiency effects of a move towards either individual taxation or family splitting.Our results indicate strongly that a switch towards individual taxation performs best in terms of economic efficiency due to reduced labor market distortions and improved insurance provision. In our benchmark calibration the efficiency gain amounts to roughly 0.4 percent of aggregate resources. Excluding home production significantly reduces aggregate efficiency gains while including marital risk slightly improves the efficiency of individual taxation.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2013/wp-cesifo-2013-09/cesifo1_wp4386.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4386.

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Date of creation: 2013
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Handle: RePEc:ces:ceswps:_4386
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  24. André Decoster & Peter Haan, 2011. "A Switch from Joint to Individual Taxation Is Welfare Improving," Discussion Papers of DIW Berlin 1175, DIW Berlin, German Institute for Economic Research.
  25. Hans Fehr & Daniela Ujhelyiova, 2011. "Fertility, Female Labor Supply, and Family Policy," CESifo Working Paper Series 3455, CESifo Group Munich.
  26. Meier, Volker & Rainer, Helmut, 2011. "On the Optimality of Joint Taxation for Non-Cooperative Couples," Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48696, Verein für Socialpolitik / German Economic Association.
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