Family Taxation and Labor Supply

I study a tax policy in Finland in 1976 that changed the basis for income taxation from couple’s joint income to individual income. Following the shift from family taxation to individual taxation, secondary earners within households experienced large drops in their participation tax rates and marginal tax rates. Because secondary earners were predominantly women, the reform leveled the differences in labor market opportunities between men and women. I find that the reform-induced changes in participation tax rates contributed to the rise in female employment over the 1970s – I estimate that the policy encouraged around 7,800 women to participate in the labor market, increasing married women’s employment rate by 1.7 percentage points. The effects correspond to an average participation elasticity of 0.17. The increases in employment were driven by women with compulsory education and mothers with school-age children. For mothers, the participation elasticities range from zero to 0.3 depending on the age of the youngest child. Finally, I show that the shift from family to individual income taxation influenced how income is shared within households among self-employed couples, generating bunching at 0.5 in the share distribution.