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

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Author Info
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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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
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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. Alberto Alesina & Andrea Ichino & Loukas Karabarbounis, 2007. "Gender Based Taxation and the Division of Family Chores," IZA Discussion Papers 3233, Institute for the Study of Labor (IZA). [Downloadable!]
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  2. Viktor Steiner & Katharina Wrohlich, 2004. "Household Taxation, Income Splitting and Labor Supply Incentives: A Microsimulation Study for Germany," Discussion Papers of DIW Berlin 421, DIW Berlin, German Institute for Economic Research. [Downloadable!]
  3. François Bourguignon & Amedeo Spadaro, 2005. "Tax-benefit revealed social preferences," PSE Working Papers 2005-22, PSE (Ecole normale supérieure). [Downloadable!]
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  4. Emmanuel Saez, 2002. "Optimal Income Transfer Programs: Intensive Versus Extensive Labor Supply Responses," The Quarterly Journal of Economics, MIT Press, vol. 117(3), pages 1039-1073, August. [Downloadable!] (restricted)
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  5. Patricia F. Apps & Ray Rees, 1999. "Individual versus Joint Taxation in Models with Household Production," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 393-403, April. [Downloadable!] (restricted)
  6. Ugo Colombino & R. Aaberge & T. Wennemo, 2006. "Evaluating Alternative Representations of the Choice Sets in Models of Labour Supply," CHILD Working Papers wp17_06, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY. [Downloadable!]
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  7. Heckman, James J, 1993. "What Has Been Learned about Labor Supply in the Past Twenty Years?," American Economic Review, American Economic Association, vol. 83(2), pages 116-21, May. [Downloadable!] (restricted)
  8. 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). [Downloadable!]
  9. Aaberge, Rolf & Dagsvik, John K & Strom, Steinar, 1995. " Labor Supply Responses and Welfare Effects of Tax Reforms," Scandinavian Journal of Economics, Blackwell Publishing, vol. 97(4), pages 635-59, December.
  10. Olivier Bargain & Marco Caliendo & Peter Haan & Kristian Orsini, 2006. "'Making Work Pay' in a Rationed Labour Market," IZA Discussion Papers 2033, Institute for the Study of Labor (IZA). [Downloadable!]
  11. 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, vol. 125(1), pages 39-49.
  12. Kleven, Henrik & Kreiner, Claus Thustrup & Saez, Emmanuel, 2006. "The Optimal Income Taxation of Couples," CEPR Discussion Papers 5978, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  13. Peter Haan & Katharina Wrohlich, 2007. "Optimal Taxation: The Design of Child Related Cash- and In-Kind-Benefits," IZA Discussion Papers 3128, Institute for the Study of Labor (IZA). [Downloadable!]
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  14. 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, vol. 119(535), pages F101-F121, 02. [Downloadable!] (restricted)
  15. 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. [Downloadable!]
  16. Rolf Aaberge & Ugo Colombino, 2008. "Designing Optimal Taxes with a Microeconometric Model of Household Labour Supply," CHILD Working Papers wp06_08, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY. [Downloadable!]
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  17. Duncan, Alan & Weeks, Melvyn, 1997. "Behavioural tax microsimulation with finite hours choices," European Economic Review, Elsevier, vol. 41(3-5), pages 619-626, April. [Downloadable!] (restricted)
  18. Richard Blundell & Andrew Shephard, 2008. "Employment, hours of work and the optimal design of earned income tax credits," IFS Working Papers W08/01, Institute for Fiscal Studies. [Downloadable!]
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