Template-Type: ReDIF-Paper 1.0
Title: Withheld from Working More? Withholding Taxes and the Labor Supply of Married Women
Author-Name: Tim Bayer
Author-Email:
Author-Name: Lenard Simon
Author-Email:
Author-Name: Jakob Wegmann
Author-Email: 

Classification-JEL: H21, H31, J16, J20, K34
Keywords: Withholding Taxes, Income Taxation, Gender, Labor Supply

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.

Note: 
Length: 82
Creation-Date: 2025-01
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp631
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2025_631