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Optimal Income Taxation of Married Couples: An Empirical Analysis of Joint and Individual Taxation

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  • Peter Haan
  • Dolores Navarro

Abstract

In this paper we develop a discrete model of optimal taxation of married couples and empirically discuss the optimality of income taxation for this group. To this end, we derive the social welfare function which guarantees that joint taxation of married couples is optimal. We will contrast this welfare function with the one that makes a system of individual taxation optimal. For the empirical application we use a static structural labor supply model to estimate the preferences of households. We find that the system of joint taxation is only optimal when the government has a high taste for redistribution towards one-earner couples and a very low or even negative taste for redistribution towards couples in which both partners earn a similar amount of income. In contrast, the optimality of individual taxation is less dependent of the working composition within the household.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.90469.de/dp838.pdf
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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 838.

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Length: 35 p.
Date of creation: 2008
Date of revision:
Handle: RePEc:diw:diwwpp:dp838

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Keywords: Optimal taxation of married couples; joint taxation; labor supply estimation;

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  1. Emmanuel Saez, 2002. "Optimal Income Transfer Programs: Intensive Versus Extensive Labor Supply Responses," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(3), pages 1039-1073, August.
  2. Duncan, Alan & Weeks, Melvyn, 1997. "Behavioural tax microsimulation with finite hours choices," European Economic Review, Elsevier, Elsevier, vol. 41(3-5), pages 619-626, April.
  3. Rolf Aaberge & Ugo Colombino, 2006. "Designing Optimal Taxes with a Microeconometric Model of Household Labour Supply," ICER Working Papers, ICER - International Centre for Economic Research 37-2006, ICER - International Centre for Economic Research.
  4. Alberto Alesina & Andrea Ichino & Loukas Karabarbounis, 2007. "Gender Based Taxation and the Division of Family Chores," NBER Working Papers 13638, National Bureau of Economic Research, Inc.
  5. Peter Haan & Katharina Wrohlich, 2010. "Optimal Taxation: The Design of Child-Related Cash and In-Kind Benefits," German Economic Review, Verein für Socialpolitik, Verein für Socialpolitik, vol. 11, pages 278-301, 08.
  6. François Bourguignon & Amadéo Spadaro, 2008. "Tax-benefit revealed social preferences," PSE Working Papers halshs-00586292, HAL.
  7. Ugo Colombino & Rolf Aaberge & Tom Wennemo, 2005. "Evaluating Alternative Representations of the Choice Sets in Models of Labour Supply," Econometrics, EconWPA 0510001, EconWPA.
  8. Richard Blundell & Andrew Shephard, 2012. "Employment, Hours of Work and the Optimal Taxation of Low-Income Families," Review of Economic Studies, Oxford University Press, vol. 79(2), pages 481-510.
  9. Bonin, Holger & Kempe, Wolfram & Schneider, Hilmar, 2002. "Household Labor Supply Effects of Low-Wage Subsidies in Germany," IZA Discussion Papers 637, Institute for the Study of Labor (IZA).
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  11. Bargain, Olivier & Caliendo, Marco & Haan, Peter & Orsini, Kristian, 2006. "'Making Work Pay' in a Rationed Labour Market," IZA Discussion Papers 2033, Institute for the Study of Labor (IZA).
  12. Heckman, James J, 1993. "What Has Been Learned about Labor Supply in the Past Twenty Years?," American Economic Review, American Economic Association, American Economic Association, vol. 83(2), pages 116-21, May.
  13. Richard Blundell & Mike Brewer & Peter Haan & Andrew Shephard, 2009. "Optimal Income Taxation of Lone Mothers: An Empirical Comparison of the UK and Germany," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 119(535), pages F101-F121, 02.
  14. Peter Haan, 2006. "Much ado about nothing: conditional logit vs. random coefficient models for estimating labour supply elasticities," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 13(4), pages 251-256.
  15. Aaberge, Rolf & Dagsvik, John K & Strom, Steinar, 1995. " Labor Supply Responses and Welfare Effects of Tax Reforms," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 97(4), pages 635-59, December.
  16. Kleven, Henrik & Kreiner, Claus Thustrup & Saez, Emmanuel, 2006. "The Optimal Income Taxation of Couples," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5978, C.E.P.R. Discussion Papers.
  17. Viktor Steiner & Katharina Wrohlich & Peter Haan & Johannes Geyer, 2008. "Documentation of the Tax-Benefit Microsimulation Model STSM: Version 2008," Data Documentation 31, DIW Berlin, German Institute for Economic Research.
  18. Patricia F. Apps & Ray Rees, 1999. "Individual versus Joint Taxation in Models with Household Production," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 107(2), pages 393-403, April.
  19. Peter Haan & Viktor Steiner, 2005. "Distributional Effects of the German Tax Reform 2000 - A Behavioral Microsimulation Analysis," Schmollers Jahrbuch : Journal of Applied Social Science Studies / Zeitschrift für Wirtschafts- und Sozialwissenschaften, Duncker & Humblot, Berlin, Duncker & Humblot, Berlin, vol. 125(1), pages 39-49.
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