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Should day care be subsidized?

  • Domeij, David

    ()

    (Dept. of Economics, Stockholm School of Economics)

  • Klein, Paul

    ()

    (Institute for International Economics)

In an economy with distortionary taxes on labor, can subsidies on day care, financed by an increase in taxes, raise welfare by encouraging women with small children to work? We show, within a heterogeneous-agent life-cycle framework, that the Ramsey optimal policy consists in equalizing consumption/leisure wedges over the life cycle and across agents. A simple way to implement this is to make day care expenses tax deductible. Calibrating our model to Germany, we find that tax deductibility for day care expenses leads to an approximate doubling of labor supply for both married and single mothers with small children. The overall welfare gain from optimal reform corresponds to a 1.0 percent increase in consumption.

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Paper provided by Stockholm School of Economics in its series SSE/EFI Working Paper Series in Economics and Finance with number 0729.

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Length: 43 pages
Date of creation: 11 Jun 2010
Date of revision:
Handle: RePEc:hhs:hastef:0729
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  1. Blackorby, Charles & Donaldson, David, 1988. "Cash versus Kind, Self-selection, and Efficient Transfers," American Economic Review, American Economic Association, vol. 78(4), pages 691-700, September.
  2. Ted Bergstrom & Soren Blomquist, 1994. "The Political Economy of Publicly Supplied Day Care," Papers _034, University of Michigan, Department of Economics.
  3. Olovsson, Conny, 2004. "Why do Europeans Work so Little?," Seminar Papers 727, Stockholm University, Institute for International Economic Studies.
  4. Andres Erosa & Martin Gervais, 2000. "Optimal taxation in life-cycle economies," Working Paper 00-02, Federal Reserve Bank of Richmond.
  5. David Domeij & Martin Floden, 2006. "The Labor-Supply Elasticity and Borrowing Constraints: Why Estimates are Biased," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 242-262, April.
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  7. Blomquist, Sören & Christiansen, Vidar, 1998. "The Political Economy of Publicly Provided Private Goods," Working Paper Series 1998:14, Uppsala University, Department of Economics.
  8. Siv Gustafsson & Frank Stafford, 1992. "Child Care Subsidies and Labor Supply in Sweden," Journal of Human Resources, University of Wisconsin Press, vol. 27(1), pages 204-230.
  9. David C. Ribar, 1992. "Child Care and the Labor Supply of Married Women: Reduced Form Evidence," Journal of Human Resources, University of Wisconsin Press, vol. 27(1), pages 134-165.
  10. MaCurdy, Thomas E, 1981. "An Empirical Model of Labor Supply in a Life-Cycle Setting," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1059-85, December.
  11. Henry Ohlsson & Michael Lundholm, 1998. "Wages, taxes and publicly provided day care," Journal of Population Economics, Springer;European Society for Population Economics, vol. 11(2), pages 185-204.
  12. Besley, T. & Coate, S., 1989. "Public Provision Of Private Goods And The Redistribution Of Income," Papers 36, Princeton, Woodrow Wilson School - Discussion Paper.
  13. Wrohlich, Katharina, 2006. "Labor Supply and Child Care Choices in a Rationed Child Care Market," IZA Discussion Papers 2053, Institute for the Study of Labor (IZA).
  14. Bergstrom, T. & Blomqust, S., 1993. "The Political Econmomy of Subsidized Day Care," Papers 1993-15, Uppsala - Working Paper Series.
  15. James J. Heckman, 1974. "Effects of Child-Care Programs on Women's Work Effort," NBER Chapters, in: Marriage, Family, Human Capital, and Fertility, pages 136-169 National Bureau of Economic Research, Inc.
  16. Larry E. JONES & Rodolfo E. MANUELLI & Ellen R. McGRATTAN, 2015. "Why Are Married Women Working so much ?," JODE - Journal of Demographic Economics, Cambridge University Press, vol. 81(1), pages 75-114, March.
  17. Richard Rogerson, 2006. "Understanding Differences in Hours Worked," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(3), pages 365-409, July.
  18. Paul Klein & David Domeij, 2008. "Should daycare be subsidized?," 2008 Meeting Papers 750, Society for Economic Dynamics.
  19. Nabanita Datta Gupta & Marianne Simonsen, 2007. "Non-cognitive Child Outcomes and Universal High Quality Child Care," Economics Working Papers 2007-17, Department of Economics and Business Economics, Aarhus University.
  20. Bruce, Neil & Waldman, Michael, 1991. "Transfers in Kind: Why They Can Be Efficient and Nonpaternalistic," American Economic Review, American Economic Association, vol. 81(5), pages 1345-51, December.
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  23. Willem Adema & Donald Gray & Sigrun Kahl, 2003. "Social Assistance in Germany," OECD Labour Market and Social Policy Occasional Papers 58, OECD Publishing.
  24. Merz, Monika, 2004. "Women's Hours of Market Work in Germany: The Role of Parental Leave," IZA Discussion Papers 1288, Institute for the Study of Labor (IZA).
  25. David Carey & Harry Tchilinguirian, 2000. "Average Effective Tax Rates on Capital, Labour and Consumption," OECD Economics Department Working Papers 258, OECD Publishing.
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  27. Coate, Stephen, 1995. "Altruism, the Samaritan's Dilemma, and Government Transfer Policy," American Economic Review, American Economic Association, vol. 85(1), pages 46-57, March.
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