Tax Incentives and Family Labor Supply in Austria

This paper approaches the question whether and to what extent a policy shift from universal child transfers towards child tax deductibles is capable of activating (mostly female) unused labor market potential in Austria. We develop a discrete choice labor supply model based on the EU-SILC datasets 2004-2010 and present static uncompensated own and cross wage elasticities at the intensive and extensive margins. We find that the family policy reform 2009 had only small employment effects, most of them being generated through the introduction of a child care deductible. To illustrate the employment potential of a shift from transfers to tax deductibles we propose several simulations showing that such a policy shift would yield an increase in full time equivalents of approximately 1.3% overall, with females in couples increasing their labor supply by up to 3.9%. Although the proposed policy shifts have highly regressive effects in terms of their impact on the distribution of disposable income, we show that phasing-out the tax deductible at higher income allows, in principle, for the compensation of lower-income households without jeopardizing positive employment effects.