Reforming Family Taxation in Germany — Labor Supply versus Insurance Effects

• Published in: Finanzarchiv Vol. 71; no. 1; pp. 53 - 81
• Main Authors: Fehr, Hans, Kallweit, Manuel, Kindermann, Fabian
• Format: Journal Article
• Language: English
• Published: Tuebingen Mohr Siebeck 01-03-2015
• Subjects: Couples; Economic models; Efficiency; Females; Homework; Households; Income taxes; Labor market; Labor supply; Macroeconomics; Marriage; Sensitivity analysis; Simulation; Studies; Tax rates; Tax reform; Taxation; Women; Germany
• ISSN: 0015-2218; 1614-0974
• DOI: 10.1628/001522115X14206439673170

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.