Essays in Fiscal Policy: On Couples, Taxation and Labor Supply

Abstract

In the U.S. and many other countries, labor income taxes and transfers are based on household income and the number of children in the household. The joint taxation of a couple’s earnings affects labor supply choices and leads to high participation tax rates for the secondary earner - typically the female, especially in the presence of children. At the same time, two trends have been visible over the last decades. First, cohabitation has emerged as a new living arrangement - these couples are taxed individually, and cohabiting relationships in the U.S. are relatively unstable compared to marriage. Second, there has been a decline in partnership formation as well as in fertility. This thesis consists of three chapters studying different aspects of decisions of couples - from the interaction of taxes with labor supply decisions of couples with children, to how taxes jointly affect household formation and labor supply decisions to a decomposition of fertility rates by marital status. In the first paper, we study how the current U.S. tax-transfer system can be reformed to lower the participation tax rates of secondary earners for married couples without a college degree who have kids attached to them. To this end, we build a dynamic structural life-cycle model where married couples with children face uninsurable idiosyncratic labor market and childcare cost risk. Married couples in our model face labor supply choices for both partners and a consumption-savings choice. Human capital of females evolves endogenously. One main feature of our paper is that we implement the U.S. tax-transfer system on the federal level with all its kinks and non-convexities. We calibrate the model to data from the Current Population Survey (CPS) for the years 2018 to 2019. We find that (i) expanding child care credits or (ii) allowing for a secondary earner deduction in the EITC both increase female employment, are easily implementable, self-financing and welfare-improving. The second paper focuses on cohabiting and married couples and how their differentiated tax treatment affects labor supply and household formation decisions. While married couples in the U.S. are taxed jointly, cohabiting couples are taxed on an individual level - which implies higher marginal tax rates for the secondary earner in married couples than in cohabiting couples. This is reflected in lower employment rates of married than cohabiting females. I develop a general equilibrium life-cycle model with endogenous household formation and idiosyncratic productivity risk. I calibrate the model to data from the U.S. and find that treating cohabiting and married couples more equally increases the share of married couples and reduces cohabitation. The labor supply effects depend on the design of the reform - taxing married couples jointly increases female and male employment rates and output, while taxing cohabiting couples jointly marginally increases female employment rates, but decreases male employment rates and is welfare-decreasing. In the third paper, we document changes in fertility rates across the U.S. and Europe over the past two decades alongside changes in marriage and cohabitation patterns. While union formation is a key proxy determinant of fertility, its quantitative contribution to recent fertility changes remains insufficiently documented. We apply a Kitagawa decomposition of total fertility rates to differentiate between the contribution of changing shares of women being married or cohabiting and the contribution of changes in fertility rates conditional on relationship status. We find that declines in marital and cohabiting individuals contributed negatively to fertility rates across all countries while within-status fertility responses vary substantially.