Taxes, education,marriage and labor supply

This paper analyzes the impact of income tax policy on household labor supply through two key life-cycle choices: education and marriage/divorce. To this end, I construct a quantitative life-cycle model to study the effects of changes in the degree of tax progressivity and in the unit of taxation on household labor supply.The model is calibrated to match key statistics in the United States economy, and then I analyze the impact of several tax reforms on labor supply. I find that when the unit of taxation is changed from the family to the individual this reduces the tax burden on secondary earners, which increases women’s education and labor supply, but has a negligible effects on men. Further, I find that small reductions in the progressivity of the tax schedule increase college enrollment and labor supply. To drive these results, the marriage/divorce decision is important because it amplifies the effect of tax reforms on labor supply and education. My experiments demonstrate that one underestimates the impact of income tax reforms on labor supply if life-cycle choices are ignored.