07 April 2008

Can Gender Based Taxation boost female employment?

Female (un)employment is one of the hottest problems of modern economies, and yet it’s one not tackled enough as it should be. While everyone knows the many benefits that a higher female participation rate can assure to family incomes and national economies, the gender gap in labor participation is still dramatically relevant in many countries. Talking about Europe, the Lisbon Agenda sets a 60% women employment rate as the goal to be reached within 2010. Today, in Greece, Italy, Malta and Poland women employment rate is below 50%. In developing countries, the picture is even worse.

Last summer A. Alesina and A. Ichino, two famous Italian economists teaching at Harvard University and University of Bologna, proposed a gender based taxation (GBT) to foster female employment in Italy and, in general, in all countries with sharp gender differences in labor markets. They later published two very interesting papers (Gender Based Taxation and Gender Based Taxation and the Division of Family Chores), where they do some empirical calculations and they set up a model to explore gender elasticities in labor supply, considering elasticity both as exogenous and endogenous variable.

Their intuitive reasoning goes as follows: empirical evidence from many studies on OCSE countries shows that women have a more elastic labor supply than men, because of economic, cultural and biological reasons. On the contrary, men have a quite inelastic labor supply, since in the family the man usually works “in any case”, despite varying wage condition. A good way to boost female employment is therefore to tax women less and men more, as the Ramsey principle about optimal taxation would suggest.
This tax reallocation has two fundamental advantages: first, it changes the bargaining power within the couple, leading to more equitable redistribution of household duties and market activities, and to an increase in society welfare. Second, it can be implemented without any financial cost for the government, thus being easily approvable (compared with other expensive services reforms). This latter point comes again from elasticity implications: the raise in men’s taxation, and the subsequent raise in tax income – given low male elasticity – can greatly compensate a decrease in women taxation.

Alesina and Ichino’s calculations suggest that female tax rate can be 67% of male rate in Italy, while 91% in Norway (which has a opposite framework compared to Italy). Similar calculations could be carried out for many countries.

This GBT proposal arose, of course, many criticisms. T. Boeri et al. claim, for instance, that female labor supply is not so elastic: when the woman is the only worker in the family (e.g. single mothers), her elasticity is similar to the male one. Moreover, female unemployment is mainly due to lack of childcare services on the market and to cultural stigma on women not taking care of their young children; indeed, in Italy only 30% of women go back to work after having a child. An indiscriminate lower female taxation could benefit wives of stock-option-holding millionaires, while pushing single men on the black market to avoid higher taxation. An approach focused on specific categories of women would therefore be more advisable.

With presidential campaign going on in Italy, the topic of female labor participation has recently appeared again in newspapers. Somehow following economists’ suggestions, the leftwing candidate proposes a tax credit for working mother with low income. While this proposal would clearly benefit the targeted segment, it’s not clear why we should discriminate women who chose not to have children. Recent empirical evidence shows that women with higher income have more children: indeed, if we want to boost fertility, we should subsidize poor women without children.
Finally, while the tax credit proposal better deals with possible shortcomings of GBT proposal, it is not without costs. In this scenario, the government would actually raise fewer taxes, and budget coverage is not an easy matter, especially for countries with high deficit.

Given the many plausible benefits of GBT and its cost-free framework, why don’t give it a try as a starter for deeper changes?


Anonymous said...

I've got a better idea, why don't we bar women under 40 from the labor pool and pay them a subsidy based on the number of children they have? As long as the subsidy isn't enough to live on they will be forced to marry or otherwise pair-bond in order to leave the family home. Furthermore, once they are married their only opportunity to contribute to the family finances will be to procreate. In effect, babies will be their business. We would probably have to relax the prohibitions against polygamy to guarantee that there are sufficient numbers of men earning enough to support these women.

Anonymous said...

Absolutely sick proposal. I'd rather pay a 'jewish tax' -- being Jewish myself. Seriously, this is almost as bad as Hitler. If this proposal is ever implemented in my country, I'll do everything to help destroy the economy and the tax system completely (massive strikes, civil disobedience, sabotage). And I won't be the only one, you can bet on it! And yes, I'd rather die than accept such humiliation.

Anonymous said...

And to be sure, my comment was aimed at 'gender-based taxation' in the line of Alesina et al. (not at the previous comment)