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Reforming Family Taxation in Germany – Labor Supply versus Insurance Effects

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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 decide on labor supply and homework under income and life-span risk. We compute welfare changes across households and isolate aggregate efficiency effects of a move towards either individual taxation or family splitting. In terms of economic efficiency a switch towards individual taxation performs better than family taxation, due to reduced labor market distortions and improved insurance provision. The efficiency increases even further when individual taxation is combined with a child-splitting factor. Since such a reform also has very favorable distributional consequences, it should be seriously considered in the political debate.
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Keywords: FEMALE LABOR SUPPLY; HOME PRODUCTION; INSURANCE PROVISION; STOCHASTIC GENERAL EQUILIBRIUM; TAX UNIT CHOICE

Document Type: Research Article

Publication date: 01 March 2015

This article was made available online on 17 February 2015 as a Fast Track article with title: "Reforming Family Taxation in Germany --- Labor Supply versus Insurance Effects".

More about this publication?
  • As one of the world's oldest professional journals in public finance, founded in 1884, FinanzArchiv (FA) publishes original work from all fields of public economics which are of interest to an international readership, e.g. taxation, public debt, public goods, public choice, federalism, market failure, social policy, and the welfare state. Special emphasis is on high-quality theoretical and empirical papers on current policy issues.

    FA is a peer-reviewed journal commited to a prompt turnaround of submissions.

    FA is listed in the Social Science Citation Index (SSCI), in Current Contents/Social and Behavioral Sciences, in Econ Lit, in the Journal of Economic Literature, in IDEAS and RePEc and in the International Bibliography of the Social Sciences.

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