DP6702 Taxation, Aggregates and the Household

Author(s): Nezih Guner , Remzi Kaygusuz , Gustavo Ventura

Publication Date: February 2008

Keyword(s): labour force participation , taxation , two-earner households

JEL(s): E62 , H31 , J12 , J22

Programme Areas: International Macroeconomics , Public Policy

Link to this Page: www.cepr.org/pubs/dps/DP6702.asp.asp

We evaluate reforms to the U.S. tax system in a dynamic setup with heterogeneous married and single households, and with an operative extensive margin in labour supply. We restrict our model with observations on gender and skill premia, labour force participation of married females across skill groups, and the structure of marital sorting. We study four revenue-neutral tax reforms: a proportional consumption tax, a proportional income tax, a progressive consumption tax, and a reform in which married individuals file taxes separately. Our findings indicate that tax reforms are accompanied by large and differential effects on labour supply: while hours per-worker display small increases, total hours and female labour force participation increase substantially. Married females account for more than 50% of the changes in hours associated to reforms, and their importance increases sharply for values of the intertemporal labour supply elasticity on the low side of empirical estimates. Tax reforms in a standard version of the model result in output gains that are up to 15% lower than in our benchmark economy.