Tax Rates And Women’s Labor Force Participation

I think Robert Lucas is vastly overstating the role of marginal tax rates in explaining output gaps between developed countries, but I think it would be useful for progressives to hear about the link between taxes and the labor force participation of married women since it is a real issue.

Think about a one-earner married couple with kids. The stay-at-home partner in this relationship isn’t doing nothing. He or she (but in practice almost always a she) is engaged in a ton of valuable household production. She’s taking care of the kids. She’s doing housework. She’s cooking meals. She’s probably managing various aspects of household finance. If she’s thinking about taking a job outside of the house, something she and her husband need to consider is that her wages will be partially offset by diminished household production. Day care for the kids. More prepared food. A maid to clean the house once a week. Maybe dad’s shirts get sent to the cleaners rather than washed and ironed at home. In other words, the real economic rewards of doing less household production and more market production are considerably smaller than the nominal wage. But she has to pay taxes on the entire nominal wage. This can make it actually not worthwhile to take certain jobs (or to shift from part-time to full-time work) that would be otherwise appealing. The supply-side effect is actually twofold here, because not only does the wife not do market work here, but if she was shifting out of household production and into market production she would hire someone else to do some of the lost household production for market wages. In other words, you can have both fewer working mothers and also reduced earnings by maids and day care workers.

I would say the right way to think about this is through a feminist lens. The tax code is supposed to allow a person to deduct un-reimbursed business expenses from their personal income taxes. If you buy a lawnmower and more money mowing lawns, you’re taxed on the net income you earn after the cost of the lawnmower not on the gross income. But if you need to hire a babysitter to be able to mow the lawn, you can’t deduct that. This is one of dozens and dozens of ways in which contemporary societies implicitly embed the assumption that a “household” consists of a man who does market labor who’s backstopped by a woman who does household production. But you can’t just take a political order that’s been constructed over hundreds of years on the basis of the disempowerment of women, and then just tack women’s equality on. It does happen to be the case that higher marginal tax rates exacerbate this particular inequity. But the issue is distinct from the general problems of tax policy and closely allied to a set of family policy and gender equity issues. If you look at Sweden where they have one of the highest women’s workforce participation rates in the world you won’t see a low-tax country, you’ll see a country that does much more than most places to support women’s equality.