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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.diw.de/documents/publikationen/73/diw_01.c.434125.de/diw_sp0613.pdf
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Paper provided by DIW Berlin, The German Socio-Economic Panel (SOEP) in its series SOEPpapers on Multidisciplinary Panel Data Research with number 613.

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Length: 33 p.
Date of creation: 2013
Date of revision:
Handle: RePEc:diw:diwsop:diw_sp613
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  16. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, vol. 59(2), pages 371-96, March.
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  23. Patricia F. Apps & Ray Rees, 1999. "Individual versus Joint Taxation in Models with Household Production," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 393-403, April.
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  26. Patricia Apps & Ray Rees, 2011. "Optimal Taxation and Tax Reform for Two-Earner Households," CESifo Economic Studies, CESifo, vol. 57(2), pages 283-304, June.
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  28. Stefan Bach & Johannes Geyer & Peter Haan & Katharina Wrohlich, 2011. "Reform of Income Splitting for Married Couples: Only Individual Taxation Significantly Increases Working Incentives," DIW Economic Bulletin, DIW Berlin, German Institute for Economic Research, vol. 1(5), pages 13-19.
  29. Giacomo Corneo, 2013. "A Note on the Taxation of Couples Under Income Uncertainty," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 69(1), pages 129-134, March.
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