Taxation and the Earnings of Husbands and Wives: Evidence from Sweden

Abstract

I examine the response of husbands' and wives' earnings to a tax reform in which husbands' and wives' tax rates changed independently, allowing me to examine the effect of both spouses' incentives on each spouse's behavior. I analyze the large Swedish tax reform of 1990-1991 and find that in response to a compensated fall in one spouse's tax rate, each spouse's earnings rise. I compare these results to those of simplified econometric models used in the typical setting in which independent variation in each spouse's tax rate is unavailable. I find that standard econometric specifications may produce substantially biased estimates. The Wharton School, University of Pennsylvania, and NBER October 2012Abstract This paper examines the response of husbands'and wives'earnings to a tax reform in which husbands'and wives'tax rates changed independently, allowing me to examine the e¤ect of both spouses' incentives on each spouse's behavior. I compare the results to those of more simpli…ed econometric models that are used in the typical setting in which such independent variation is not available. Using administrative panel data on approximately 11% of the married Swedish population, I analyze the impact of the large Swedish tax reform of 1990-1. I …nd that in response to a compensated fall in one spouse's tax rate, that spouse's earned income rises, and the other spouse's earned income also rises. A standard econometric speci…cation, in which one spouse reacts to the other spouse's income as if it were unearned income, yields biased coe¢ cient estimates. Uncompensated elasticities of earned income with respect to the fraction of income kept after taxes are over-estimated by a factor of more than three, and income e¤ects are of the wrong sign. A second common speci…cation, in which overall family income is related to the family's tax rate and income, also yields substantially over-estimated own compensated and uncompensated elasticities. Standard econometric approaches may substantially mis-estimate earnings responses to taxation.

Bounds on Elasticities With Optimization Frictions: A Synthesis of Micro and Macro Evidence on Labor Supply

“…The unified upper bound is ε U = 0 51, obtained from Blau and Kahn's (2007) estimate using cross-sectional wage variation in the United States. These bounds are robust in the sense that even if one excludes these two pivotal studies, the unified bounds expand only to (0 44 0 54), with the pivotal estimates now coming from Kopczuk (2010) and Gelber (2010).…”

“…When only studies 1-15 (panels A and B) are used, the unified bounds are (0 28 0 54). a Swedish tax reform in 1991 termed the "tax reform of the century" (Gelber (2010)). This pattern is consistent with the view that frictions are less likely to attenuate short-run responses to very large price changes.…”

Economic Incentives, Home Production and Gender Identity Norms

“…The recent literature on labor supply has instead estimated the impact of taxes on earnings, by exploiting variation from tax reforms and information on taxable earnings from administrative sources (see for example Gruber and Saez, 2002). Closely related to our work, Gelber (2014) estimates the response of spouses' earned income to tax changes in Sweden.…”

The Labour Market Effects of Increases in Social Insurance Premium: Evidence from Japan

“…For example, seeGelber (2014),Meghir and Phillips (2008),Blundell et al (1998),Feldstein and Feenberg (1996),Feldstein (1995) andAaron (1981).© 2018 The Department of Economics, University of Oxford and John Wiley & Sons Ltd…”