Tax Reforms and Labor Force Participation of Married Women Economics Students Association seminar The presentation is based on “To Work or Not to Work: Did Tax Reforms Affect Labor Force Participation of Secondary Earners?” by: Michael Bar and Oksana Leukhina

2 The Tax Panic

3 Labor Force Participation in U.S.

4 Questions How did taxes reforms affect the households’ decisions to participate in the labor market? Is the U.S. tax system progressive? What are the effects of various tax laws on household’s behavior?

5 Plan 1.Visualizing tax laws (using TAXSIM) 2.Case study: Earned Income Tax Credit 3.New methodology for studying the effects of taxes

6 Federal Income Taxes in 2006

7 Example (singles) Suppose that your taxable income in 2006 was $70,000. How much federal income tax should you pay?

8 Major Tax Reforms in the Federal Income Tax Code

9

10 Taxes Are More Complicated Than That Federal Income Tax FICA (Federal Insurance Contributions Act tax): O Social Security: 6.2% up to a limit of $94,200 O Medicare 1.45% State Taxes

11 Visualizing FICA Taxes

12 Visualizing the Federal Income Tax Much more complicated than FICA All sorts of deductions that depend on age, number of children, mortgage, etc.) Need to look at actual returns to see how much people paid – TAXSIM (Tax Simulator).

13 TAXSIM

14 Computing Tax Returns With TAXSIM

15 Using TAXSIM to Visualize the Federal Income Taxes Effects of Earned Income Tax Credit

16 Earned Income Tax Credit Wage subsidy for low-income workers. EITC is the largest poverty reduction program in the United States EITC enjoys broad bipartisan support.

17 Earned Income Tax Credit

18 EITC Parameters Phase in Plateau Phase out

19 EITC Incentives for Married Couples Husband’s Income Wife’s Income Total Federal Tax Liability (2007) Average Tax Rate on Wife’s Income $20, , $20,000 1, %

20 Comparison to a Single Earner Single Earner’s income Total Federal Tax Liability (2007) $100,000 $19, (Or 19.66% of income)

21 New Methodology: Combining TAXSIM With an Economic Model Write down an economic model with many married couples, that earn income and make joint participation decisions. File taxes for all the couples in the model, and let the couples choose who goes to work (husband, wife, both). Change the tax laws (the year of the tax code) and see how the couples in the model respond to changes in taxes.

22 Filing tax Returns for Many Couples

23 Effects of Taxes on Participation of Married Couples

24 Effect of EITC Reforms on Participation

25 Summary It is possible to combine the realistic tax laws with economic models (using TAXSIM). Taxes in the U.S. changed a lot, but these changes had little effect on the total Labor Force Participation of married couples. Our results suggest that the EITC might have decreased the labor force participation of wives married to low-earning husbands.