Getting out of the Second Earner Trap: Reform Proposals to Reduce Misaligned Incentives in the German Tax and Social Security System

In the study on which this report is based, we examined closely the oft-discussed proposals for reforms aimed at improving employment incentives for second earners in a household. To quantify the effects of the proposed reforms on labor supply, we used the ifo microsimulation model, an empirically estimated structural labor supply model in a household context. Our research shows that reforming spousal taxation by introducing a so-called real splitting model, that is, by limiting the income splitting bonus with a maximum carry-over amount of €13,805 would strengthen the incentive for secondary earners to expand their labor supply. Increases in the female labor supply would account in large part for the reform’s positive employment effects. Combining this reform with a reform of mini- and midi-job regulations could eliminate other incentive problems: Women in particular could thus escape the "secondary earner trap" into which they fall or are in danger of falling by working only a limited number of hours.