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Optimal tax and transfer programs for couples with extensive labor supply responses

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Author Info

  • Immervoll, Herwig
  • Kleven, Henrik Jacobsen
  • Kreiner, Claus Thustrup
  • Verdelin, Nicolaj

Abstract

This paper analyzes the optimal design of general nonlinear tax-transfer schedules for couples under unitary and collective approaches to family decision making. We consider a double-extensive model of labor supply where each spouse makes a labor force participation choice for given hours of work. We present simple and intuitive optimal tax rules that generalize existing findings on the optimal taxation of single-person households with extensive responses (Saez, 2002) to the case of two-person households with double-extensive responses. Without income effects on labor supply, optimal tax rules as a function of sufficient statistics are the same under the unitary and collective approaches. With income effects on labor supply, optimal tax rules under the two approaches continue to depend on the same sufficient statistics, but the collective model features an additional Pigouvian term arising from a within-family participation externality. Finally, we present microsimulations of tax reform for 15 European countries suggesting that a reduction of tax rates on secondary earners relative to primary earners is associated with strong welfare gains in all countries.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 95 (2011)
Issue (Month): 11 ()
Pages: 1485-1500

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Handle: RePEc:eee:pubeco:v:95:y:2011:i:11:p:1485-1500

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Web page: http://www.elsevier.com/locate/inca/505578

Related research

Keywords: Optimal taxation; Tax reform; Couples; Extensive labor supply responses; Unitary model; Collective model;

References

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  1. Herwig Immervoll & Henrik Jacobsen Kleven & Claus Thustrup Kreiner & Nicolaj Verdelin, 2008. "An Evaluation of the Tax-Transfer Treatment of Married Couples in European Countries," EPRU Working Paper Series 08-03, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
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Citations

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Cited by:
  1. Bach, Stefan & Corneo, Giacomo & Steiner, Viktor, 2012. "Optimal top marginal tax rates under income splitting for couples," European Economic Review, Elsevier, vol. 56(6), pages 1055-1069.
  2. Volker Meier & Matthias Wrede, 2008. "Reducing the Excess Burden of Subsidizing the Stork: Joint Taxation, Individual Taxation, and Family Tax Splitting," CESifo Working Paper Series 2470, CESifo Group Munich.
  3. Patricia Apps & Ray Rees, 2012. "Optimal Taxation, Child Care and Models of the Household," CEPR Discussion Papers 673, Centre for Economic Policy Research, Research School of Economics, Australian National University.
  4. Vidar Christiansen, 2012. "Optimal Participation Taxes," CESifo Working Paper Series 3941, CESifo Group Munich.
  5. Normann Lorenz & Dominik Sachs, 2012. "Optimal Participation Taxes and Efficient Transfer Phase-Out," Working Paper Series of the Department of Economics, University of Konstanz 2012-37, Department of Economics, University of Konstanz.
  6. Stefan Bach & Peter Haan & Richard Ochmann, 2013. "Taxation of Married Couples in Germany and the UK: One-Earner Couples Make the Difference," International Journal of Microsimulation, Interational Microsimulation Association, vol. 6(3), pages 3-24.
  7. Ooghe, Erwin & Peichl, Andreas, 2014. "Fair and efficent taxation under partial control," ZEW Discussion Papers 14-002, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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