Tax Filing Choices for the Household under Separable Spheres Bargaining
AbstractIf household choices can be rationalized by the maximization of a well defined utilityfunction, allowing spouses to file individually or jointly is equivalent to offeringthe envelope of the two tax schedules. If, instead, household ’preferences’ are constantlybeing redefined through bargaining, the option to file separately may affectoutcomes even if it is never chosen. We use Lundberg and Pollak’s (1993) separatespheres bargaining model to assess the impact of filing options on the outcomes ofprimary and secondary earners. Threat points of the household’s bargain are givenfor each spouse by the utility that he or she attains as a follower of a counter-factualoff-equilibrium Stackelberg game played by the couple. For a benchmark tax systemwhich treats a couple’s average taxable income as if it were that of a single individual,we prove that if choices are not at kinks, allowing couples to choose whether to filejointly or individually usually benefits the secondary earner. In our numeric exercisesthis is also the case when choices are at kinks as well. These findings are, however,quite sensitive to the details of the tax system, as made evident by the examinationof an alternative tax system.
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Bibliographic InfoPaper provided by FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil) in its series Economics Working Papers (Ensaios Economicos da EPGE) with number 733.
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