Should day care be subsidized?

David Domeij () and Paul Klein ()

No 729, Working Paper Series in Economics and Finance from Stockholm School of Economics

Abstract: In an economy with distortionary taxes on labor, can subsidies on day care, financed by an increase in taxes, raise welfare by encouraging women with small children to work? We show, within a heterogeneous-agent life-cycle framework, that the Ramsey optimal policy consists in equalizing consumption/leisure wedges over the life cycle and across agents. A simple way to implement this is to make day care expenses tax deductible. Calibrating our model to Germany, we find that tax deductibility for day care expenses leads to an approximate doubling of labor supply for both married and single mothers with small children. The overall welfare gain from optimal reform corresponds to a 1.0 percent increase in consumption.

Keywords: Female labor force participation; Germany; day care subsidies (search for similar items in EconPapers)
JEL-codes: E13 J13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-lab, nep-mac and nep-reg
Date: 2010-06-11
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Persistent link: http://EconPapers.repec.org/RePEc:hhs:hastef:0729

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