Abstract
Up to 1987 the Spanish Income Tax imposed compulsory joint filing for married couples. However, the 1988 reform allowed spouses to choose between joint and separate taxation, involving a reduction in tax rates for secondary earners. Our aim is to analyze this reform as a quasi-natural experiment, assessing the effects of tax changes on labor participation. To find out the causal effect we adopt the difference-in-differences technique. We use data from the ‘Spanish Income Tax Panel 1982–1998’. Our results show that, as a consequence of differential tax changes, married women in families more strongly affected by the fiscal reform increase their labor participation more than secondary earners from families less affected by the reform. The participation rate for secondary earners in the treatment group increases by 9.4 percentage points whereas the control group increases their participation rate by 7.8 percentage points. We define the treatment group as those secondary earners in relatively low-income families in year 1987 and the control group as those in middle-high income families, because the former experiences a stronger reduction in tax rates than the latter. As a result, we can attribute the 1.6-percentage-point-increase in participation rates to the 1988 income tax reform.
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Notes
The peseta was the Spanish currency before the introduction of the euro. 1 euro equals 166.386 pesetas.
We are implicitly identifying the secondary earner as a woman. Data do not provide the gender variable, so we could not distinguish in which cases the secondary earner is a woman. Nevertheless, we think that for this period (1987–1991) in Spain the assumption is quite realistic. This assumption is not really needed for our paper, but it could help to understand how the tax reforms have contributed to increase the labor participation rate of married women.
Calculating tax rates, we have chosen the effective tax rates, that is, the result of dividing Net Tax by Tax Base. In order to calculate Net Tax, we considered all the tax credits related with tax unit: General Tax Credit, Married Couples Tax Credit, Variable Tax Credit/Joint Filing Tax Credit and Labor Income Tax Credit. Nevertheless, we did not consider other family tax credits that wouldn’t affect the choice between individual filing and joint filing: Child Tax Credit, Ancestors Tax Credit, Age Tax Credit and Handicapped Tax Credit.
Child Tax Credit and Ancestors Tax Credit consist on a fixed amount per child/ancestor. Taking into account these tax credits suppose to consider family size and composition.
As stated previously, we assume that the secondary earner is a woman.
These results take into account the tax rates and the labor participation of 1991, the last year of the panel. The results for the previous years 1989 and 1990 follow the same trend (0.5 and 0.8 percentage points).
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Acknowledgments
We gratefully acknowledge the contributions of the seminar participants for their very helpful comments and suggestions at the IX Summer School in Public Economics, Georgia State University, Atlanta (2013), XXI Meeting of Public Economics, University of Girona, Spain (2014), and at a seminar given in our Department of Applied Economics at the University of Valencia (2014).
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Fuenmayor, A., Granell, R. & Mediavilla, M. The effects of separate taxation on labor participation of married couples. An empirical analysis using propensity score. Rev Econ Household 16, 541–561 (2018). https://doi.org/10.1007/s11150-016-9345-x
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DOI: https://doi.org/10.1007/s11150-016-9345-x