Optimal Opt-Out: The Effect of the Payroll Tax on Married Women’s Labor Force Participation

Abstract

Economists know incentives matter and taxes are one incentive affecting labor participation. Payroll taxes create unique disincentives to married women in the labor force. The effect of taxes on labor participation and earnings has been documented and debated, but the effect of payroll taxes on married women remains a mystery. I investigate this mystery by evaluating the effect payroll taxes have on married women’s labor participation. Because women, who are generally the secondary earners in a household, can face a marginal tax rate more than twelve (12) percentage points higher than their husbands, analysis of the disincentive effects of the payroll tax on women’s labor participation is warranted. Using data from 1999-2007 I find that married women whose husbands earn in excess of the payroll tax threshold are 10 percentage points less likely to be in the labor force than similarly situated peers. This analysis demonstrates that some labor decisions of married women are not based on individual preferences, but are instead being perverted by adverse incentives springing from the tax code. Such incentives should be evaluated in any conversation about the determinative factors of women’s labor force participation.