Optimal tax treatment of the family: Married couples

Abstract

This paper examines the appropriate tax treatment of the family in a series of analytical models and numerical examples. For a population of taxpaying couples which differ in earning capacity, we derive the optimal tax rates for each potential earner. These rates depend crucially upon own and cross labor supply elasticities and the joint distribution of wage rates. Our results suggest that the current system of income splitting in the United States, under which husbands and wives face equal marginal tax rates, is nonoptimal. Using results from recent econometric studies, and allowing for a sensitivity analysis, the optimal tax rates on secondary workers in the family are much lower than those on primary earners. Indeed, our best estimate is that the secondary earner would face tax rates only one-half as high as primary earners.

Household bargaining and the design of couples’ income taxation

“…Consequently, a higher bargaining weight for the male translates into a negative marginal tax rate for the male and a positive one for the female. This is of course at odds with the conventional resultsà la Boskin and Sheshinski (1983) which are based solely on labor supply elasticity.…”

“…Following the seminal papers by Boskin (1975) and Boskin and Sheshinski (1983) the analysis of optimal family income taxation has traditionally been restricted to the framework of only linear instruments. 1 Nonlinear taxation has been studied by some authors like Schroyen (2003), Brett (2007), Kleven et al (2009) and Cremer et al (2012).…”

“…The same (couple specific weights) are used in both stages. 7 We determine the (incentive compatible) allocation that maximizes utilitarian welfare (the sum of individual utilities) under the information structure described above and study its implementation via a nonlinear tax function based on the income levels of a couples' spouses. Our utilitarian specification introduces a paternalistic dimension into the optimal tax problem whenever the female and male spouses have different weights in the couple's bargaining process.…”

Taxing women: A macroeconomic analysis

“…8 Hence, q and as a result, the labor force participation of married females, will be higher when taxes on married females are lower. Similarly, q and the the labor force participation of married females, will be higher when taxes on married males are higher.…”

“…From standard public-…nance principles, the higher labor supply elasticities of women suggest that they should be taxed at lower rates than men. Boskin and Sheshinski (1983) were possibly the …rst to establish this insight. They focused on the optimal linear-income taxation of twoearner households with exogenously given di¤erences in labor supply elasticities between men and women.…”