Withheld from Working More? Withholding Taxes and the Labor Supply of Married Women

Tim Bayer, Lenard Simon and Jakob Wegmann

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: To collect income taxes, almost all countries require employers to withhold monthly tax prepayments which are then fully credited against the őnal income tax liabilities of their employees. Despite being a fundamental component of income taxation systems worldwide, the impact of these withholding taxes on labor supply is poorly understood. We investigate their importance in the context of married couples in Germany where the withholding tax liability can be redistributed between spouses. We exploit a reform that reduced the withholding tax for some marriedwomen more than for others, while inducing no differences in income taxes. Using administrative data for the full population of German taxpayers, we estimate an elasticity of labor income with respect to the withholding tax eight years after the reform of 0.14. Additional evidence from a self-conducted survey suggests imperfect understanding of the tax system and limited pooling of resources within the household as the main mechanisms. As the majority of couples shift parts of the withholding tax liability from the husband to the wife, our results suggest that the increased withholding tax liability of married women contributes to their low labor supply. This highlights the need for governments to be aware of the distortion of labor supply incentives when the design of withholding taxes does not match actual income tax incentives.

Keywords: Withholding Taxes; Income Taxation; Gender; Labor Supply (search for similar items in EconPapers)
JEL-codes: H21 H31 J16 J20 K34 (search for similar items in EconPapers)
Pages: 82
Date: 2025-01
New Economics Papers: this item is included in nep-acc, nep-lab, nep-pbe and nep-pub
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