Should Women Pay Lower Tax?

Alberto Alesina and Andrea Ichino thinks so;

How is it possible to achieve the miracle of raising taxes on men by less than the reduction on women while also holding tax revenue constant? The answer is well known to any graduate student in public finance. The supply of labour of women is more responsive to their after-tax wage, so a reduction in taxes increases the labour participation of women substantially. Men’s labour supply is more rigid, so an increase in taxes does not reduce their labour supply by much, if at all. Ergo, for a given tax cut on women, with a smaller tax increase on men, one maintains the same total revenue with fewer tax distortions. This is simply an application of the general principle of public finance that goods with a more elastic supply should be taxed less. Our computations, available in our working paper, Gender Based Taxation*, suggest that the difference in tax rates across gender that would be implied by our proposal – based upon different labour responses to wages – could be quite large, especially in countries where the labour participation of women is not as high, such as the ­Nordic countries.

Since we are talking about people and not goods, one needs to worry about whether such a policy undermines other social goals. In fact it does not, and this is why social activists should favour it as well. Increasing the labour participation of women is an explicit goal of the European Union’s Lisbon agenda. It sets a very ambitious target for female employment, especially in southern Europe, where women tend to stay at home more. Reducing the cost of working for women (ie their taxes) is the simplest and most direct way of achieving that goal. Concern over the discrimination against women in the labour force underlies many policies of “quotas” for women or affirmative action. A lower tax on women would lower their pre-tax wage and increase their after-tax wage, making it relatively cheaper for an employer to hire women. Discrimination would then become more costly. As for pollution, it is easier and more effective to tax the undesirable activity (ie make it costly) rather than prevent it by regulation or other forms of government activism.

Often those who care about women’s work emphasise the policy of supporting it with publicly funded childcare facilities. A higher take-home salary for women created by our proposal would allow them to buy more childcare at market prices and, since childcare facilities employ mostly women, they would also benefit on their costs. Moreover childcare subsidies target only women who have children; the problems of gender discrimination and low female labour force participation are more general. Not all countries will want to subsidise fertility directly.