Gender-based taxation

The 2008-09 budget announced a series of concessions and sops for women. These include increasing the threshold for income tax exemption limit for women assessees from Rs 1.45 lakhs to Rs 1.8 lakhs. The announcement that creche facilities will not come under the purview of fringe benefit tax, will encourage more companies to set up creches for employees children. It is being claimed that all this will inspire more women to enter the workforce. This gender based tax concession comes in the wake of the conservative opposition party in the Spanish elections, Partido Popular proposing gender-based taxation in its electoral campaign.

Alberto Alesina, Andrea Ichino, and Loukas Karabarbounis explore the issue of gender based taxation in an interesting study. They write, "women have a more elastic labor supply than men and participate less in the market because of intra-family bargaining. Their labor income should be taxed less to achieve optimal taxation and to change the allocation of family chores in a way that allows females to work more in the market if they want. This tax approach may be fiscally cheaper, less distortionary and would directly address the source of labor market gender differences: intra-family bargaining".

They claim that average tax rates can be reduced without changing total tax revenues, by reducing income taxes on women and increasing, by a lesser amount, income taxes on men. This would reduce overall tax distortions, making tax policy more economically efficient, and also bring more women into the workforce. They write, "It would achieve similar goals to affirmative action policies, quotas or subsidised childcare and could substitute for those policies. It would also make gender discrimination more costly for employers and would be fair because it would compensate women for bearing the brunt of maternity and for the fact that the possibility of having children can negatively affect their career prospects."

The logic behind this proposal is this. According to Ramsay's principle of optimal taxation, goods with a more elastic supply should be taxed less. The supply of labour of women is more responsive to their after-tax wage, and 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. Therefore "for a given tax cut on women, with a smaller tax increase on men, one maintains the same total revenue with fewer tax distortions". 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.

They justify gender based taxation not only by gender differences in labour supply elasticities but also by gender differences in the earnings distribution “hazards”, "At any given income level Y, the distortions caused by the marginal tax rate t(Y) are proportional to the fraction of subjects who earn Y divided by the fraction of subjects who earn more than Y (which is the hazard of the earning distribution). This because those who earn Y are distorted at the margin by the tax rate t(Y), while, for those who earn more than Y, t(Y) is an infra-marginal tax rate that generates revenues for the government without inducing distortions. Since women have typically higher distributional hazards than men at all earning levels, gender based taxation reduces distortions through this mechanism, independently of elasticities."

The authors explore the case in which males and females are identical in terms of innate abilities, preferences and predispositions, but men have more explicit bargaining power at home, therefore they assume fewer unpleasant and tiring home duties. Hence, they participate more in the labour market, exercise more effort, earn more and engage in careers that offer ‘upside potential’ i.e. higher salaries and promotions. On the contrary, women basically work only for their wage. As a result, men are less sensitive to changes in wages since what matters for them, relative to women, is also the expected pleasure they derive from careers and market activity.

The authors also argue that "a large part of the redistribution of the tax burden implied by this proposal would occur within the same family: the husbands of married women who choose to work would also benefit from their wife earning a higher take-home salary." They also defend it from the "fairness" standpoint since women bear the brunt of maternity and early child care costs and this harms their career prospects, and lower taxes would compensate them. Gender based taxation offers a form of compensation that helps redress these inequalities in a less distortionary, more transparent and simpler way that affirmative action quotas. Further, as standard economic theory argues "quotas impose quantitative constraints that prevent agents from equalizing costs and benefits at the margin, gender-based taxation changes relative prices but lets agents free to optimize at the margin."

Extending the gender based taxation logic, it is possible to make out a case for similar taxation in other areas where social justice is administered through affirmative action quotas. The studies of Alesina et al on gender taxation and the growing body of opinion on the distortionary effects of quota based cap and trade emissions, clearly reveals that taxation may be a more efficient system than quotas.