Taxation and The Household

Author:

Kaygusuz, Remzi

Graduate Program:

Economics

Degree:

Doctor of Philosophy

Document Type:

Dissertation

Date of Defense:

May 10, 2007

Committee Members:

Edward James Green, Committee Chair/Co-Chair
Nezih Guner, Committee Member
Gustavo Ventura, Committee Member
Neil Wallace, Committee Member
Emmanouil Galenianos, Committee Member
Abdullah Yavas, Committee Member

Keywords:

social security
taxation
labor force participation
tax reform

Abstract:

This thesis consists of three chapters. The first chapter is about implications of tax reforms of 1980's on married females' labor force participation. The Economic Recovery Act of 1981 and the Tax Reform Act of 1986 changed the U.S. income tax structure in a dramatic fashion. These two reforms reduced the marginal tax rates for married households. In this paper I build a heterogeneous agent model populated by married households. Households differ by age and educational attainment levels of their members and decide whether the second earner, the wife, should participate in the market. I select parameter values so that the model economy is consistent with the 1980 U.S. economy in terms of income tax structure, wages (skill premium and gender gap), marital sorting (who is married with whom), and female labor force participation. In order to find the contribution of tax reforms to the rise in married female labor force participation, I simulate an economy with taxes of 1980 and allow wages and marital sorting take 1990 values. I show that about 28% of the rise in married female labor force participation (from 59% to 70%) between 1980 and 1990 can be accounted for by the changes in the income tax structure. The second chapter, written with Nezih Guner and Gustavo Ventura, studies the aggregate implications of different tax reforms with a new perspective. We develop a dynamic setup with heterogeneous married and single households, and with an operative extensive margin in labor supply. We restrict our model with observations on gender and skill premia, labor force participation across skill groups, and the structure of marital sorting. We then use this model to evaluate hypothetical reforms to the U.S. tax system. Replacing current income taxes by a proportional consumption tax increases steady-state output by about 10.5%. This increase is accompanied by differential effects on labor supply: while per-worker hours increase by about 3.0%, the labor force participation of secondary earners increases by 4.6% and married females increase their total hours by 7.6%. Married females account for about 51% of the total increase in labor hours. When current income taxes are replaced by a progressive consumption tax, married females account for a much larger (65.2%) share of the total increase in labor hours. Our results also show that the extent of the labor force participation by secondary earners, the wage structure (gender gap and skill premia), as well as the composition of pool of married individuals (who is married with whom) in the pre-reform economy affect aggregate outcomes in significant ways. The final chapter studies the implications of two important rules of Social Security System. The existing social security system in the U.S. has a special provision for married households: a spouse can choose between own benefits and half of the spouse's benefits. Another feature of the system is the progressive calculation of benefits: benefits are determined by a concave function of past mean earnings. I develop an equilibrium life-cycle model to quantify the aggregate, cross-sectional, and welfare implications of three alternatives: elimination of the spousal benefit, elimination of the progressivity of benefits, and the two combined. Agents start out as permanently married or single and with education levels and wage profiles, where the latter depend both on education and gender. The household is the decision maker and decides on the labor supply of its member(s) and saving. The aggregate production function has as inputs capital and labor aggregated by efficiency. Eliminating the spousal benefit provision has substantial effects. The labor force participation of married women increases by 4.5% and households composed of men with relatively high education and women with relatively low education experience significant welfare losses. When only progressivity is eliminated, there is a decline in labor force participation of married females and households composed of men with relatively high education and women with relatively low education experience significant welfare gains. When both are eliminated, the labor force participation of married women increases and households composed of two members with high education gain most.