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Should day care be subsidized?

Author

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  • Domeij, David

    () (Dept. of Economics, Stockholm School of Economics)

  • Klein, Paul

    () (Institute for International Economics)

Abstract

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.

Suggested Citation

  • Domeij, David & Klein, Paul, 2010. "Should day care be subsidized?," SSE/EFI Working Paper Series in Economics and Finance 0729, Stockholm School of Economics.
  • Handle: RePEc:hhs:hastef:0729
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    References listed on IDEAS

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    1. repec:eee:japwor:v:42:y:2017:i:c:p:45-55 is not listed on IDEAS
    2. Jeremy Greenwood & Nezih Guner & Guillaume Vandenbroucke, 2017. "Family Economics Writ Large," Journal of Economic Literature, American Economic Association, vol. 55(4), pages 1346-1434, December.
    3. David Domeij, 2013. "Should Day Care be Subsidized?," Review of Economic Studies, Oxford University Press, vol. 80(2), pages 568-595.
    4. Bick, Alexander & Fuchs-Schündeln, Nicola, 2017. "Taxation and Labor Supply of Married Couples across Countries: A Macroeconomic Analysis," IZA Discussion Papers 10504, Institute for the Study of Labor (IZA).
    5. Bick, Alexander & Choi, Sekyu, 2013. "Revisiting the effect of household size on consumption over the life-cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2998-3011.
    6. Stichnoth, Holger, 2014. "Short-run fertility effects of parental leave benefits: Evidence from a structural model," ZEW Discussion Papers 14-069, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    7. Spencer Bastani & Sören Blomquist & Luca Micheletto, 2017. "Child Care Subsidies, Quality, and Optimal Income Taxation," CESifo Working Paper Series 6533, CESifo Group Munich.
    8. CAMILLI, Andrea; LAGERBORG, Andresa, 2017. "Do Labor Market Institutions Matter for Fertility?," Economics Working Papers ECO 2017/07, European University Institute.
    9. Guner, Nezih & Kaygusuz, Remzi & Ventura, Gustavo, 2013. "Childcare Subsidies and Household Labor Supply," CEPR Discussion Papers 9775, C.E.P.R. Discussion Papers.
    10. Alessandra Casarico & Alessandro Sommacal, 2018. "Taxation and parental time allocation under different assumptions on altruism," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(1), pages 140-165, February.
    11. Eva Garcia-Moran & Zoe Kuehn, 2017. "With Strings Attached: Grandparent-Provided Child Care and Female Labor Market Outcomes," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 23, pages 80-98, January.
    12. C. Katharina Spieß, 2011. "Vereinbarkeit von Familie und Beruf – wie wirksam sind deutsche „Care Policies“?," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 12(s1), pages 4-27, May.
    13. Eva Garcia-Moran & Zoe Kuehn, 2017. "With Strings Attached: Grandparent-Provided Child Care and Female Labor Market Outcomes," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 23, pages 80-98, January.
    14. Bick, Alexander, 2010. "The quantitative role of child care for female labor force participation and fertility," MPRA Paper 25474, University Library of Munich, Germany.
    15. repec:dgr:rugsom:14007-eef is not listed on IDEAS
    16. Reijnders, Laurie S.M., 2014. "Child care subsidies with endogenous education and fertility," Research Report 14007-EEF, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    17. Bick, Alexander, 2011. "The quantitative role of child care for female labor force participation and fertility," MPRA Paper 31713, University Library of Munich, Germany.

    More about this item

    Keywords

    Female labor force participation; Germany; day care subsidies;

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • J13 - Labor and Demographic Economics - - Demographic Economics - - - Fertility; Family Planning; Child Care; Children; Youth

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