Reforming Family Taxation in Germany - Labor Supply vs. Insurance Effects

35 Pages Posted: 10 Sep 2013

See all articles by Hans Fehr

Hans Fehr

University of Würzburg - Institute of Economics and Social Sciences

Manuel Kallweit

German Council of Economic Experts

Fabian Kindermann

University of Regensburg; Netspar

Date Written: September 10, 2013

Abstract

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 have to decide on labor supply and homework facing income and lifespan risk. The numerical exercise computes the resulting welfare changes across households and isolates aggregate efficiency effects of a move towards either individual taxation or family splitting.

Our results indicate strongly that a switch towards individual taxation performs best in terms of economic efficiency due to reduced labor market distortions and improved insurance provision. In our benchmark calibration the efficiency gain amounts to roughly 0.4 percent of aggregate resources. Excluding home production significantly reduces aggregate efficiency gains while including marital risk slightly improves the efficiency of individual taxation.

Keywords: stochastic general equilibrium, home production, female labor supply, tax unit choice, insurance provision

JEL Classification: H210, H240, J120, J220

Suggested Citation

Fehr, Hans and Kallweit, Manuel and Kindermann, Fabian, Reforming Family Taxation in Germany - Labor Supply vs. Insurance Effects (September 10, 2013). CESifo Working Paper Series No. 4386, Available at SSRN: https://ssrn.com/abstract=2323347 or http://dx.doi.org/10.2139/ssrn.2323347

Hans Fehr (Contact Author)

University of Würzburg - Institute of Economics and Social Sciences ( email )

Sanderring 2
D-97070 Wuerzburg
Germany
0931- 31 29 72 (Phone)
0931- 888 71 29 (Fax)

Manuel Kallweit

German Council of Economic Experts ( email )

Federal Statistical Office
Gustav-Stresemann-Ring 11
Wiesbaden, Hessen 65180
Germany

Fabian Kindermann

University of Regensburg ( email )

Universitaetsstrasse 31
D-93040 Regensburg
Germany

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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