SSE/EFI Working Paper Series in Economics and Finance
No 729:
Should day care be subsidized?
David Domeij ()
and Paul Klein ()
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; (follow links to similar papers)
JEL-Codes: E13; J13; (follow links to similar papers)
43 pages, June 11, 2010
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