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Taxation and the Earnings of Husbands and Wives: Evidence from Sweden

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Author Info

  • M Gelber, Alexander

    ()
    (The Wharton School)

Abstract

This paper examines the response of husbands' and wives' earnings to a tax reform in which husbands' and wives' tax rates changed independently, allowing me to examine the effect of both spouses' incentives on each spouse's behavior. I compare the results to those of more simplified econometric models that are used in the typical setting in which such independent variation is not available. Using administrative panel data on approximately 11% of the married Swedish population, I analyze the impact of the large Swedish tax reform of 1990-1. I find that in response to a compensated fall in one spouse's tax rate, that spouse's earned income rises, and the other spouse's earned income also rises. I test and reject a set of models in which the family maximizes a single utility function. A standard econometric specification, in which one spouse reacts to the other spouse's income as if it were unearned income, yields biased coefficient estimates. Uncompensated elasticities of earned income with respect to the fraction of income kept after taxes are over-estimated by a factor of more than three, and income effects are of the wrong sign. A second common specification, in which overall family income is related to the family's tax rate and income, also yields substantially over-estimated own compensated and uncompensated elasticities. Standard econometric approaches may substantially mis-estimate earnings responses to taxation.

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Bibliographic Info

Paper provided by Uppsala University, Department of Economics in its series Working Paper Series, Center for Fiscal Studies with number 2012:4.

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Length: 56 pages
Date of creation: 09 Sep 2011
Date of revision:
Handle: RePEc:hhs:uufswp:2012_004

Contact details of provider:
Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
Email:
Web page: http://www.nek.uu.se/
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Related research

Keywords: taxation; earnings; labor supply; families; spouses; unitary model;

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Cited by:
  1. Goux, Dominique & Maurin, Eric & Petrongolo, Barbara, 2011. "Worktime Regulations and Spousal Labour Supply," IZA Discussion Papers 5639, Institute for the Study of Labor (IZA).

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