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An Evaluation of the Tax-Transfer Treatment of Married Couples in European Countries

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Author Info

  • Immervoll, Herwig

    ()
    (OECD, Paris)

  • Kleven, Henrik Jacobsen

    ()
    (London School of Economics)

  • Kreiner, Claus Thustrup

    ()
    (University of Copenhagen)

  • Verdelin, Nicolaj

    (University of Copenhagen)

Abstract

This paper presents an evaluation of the tax-transfer treatment of married couples in 15 EU countries using the EUROMOD microsimulation model. First, we show that many tax-transfer schemes in Europe feature negative jointness defined as a situation where the tax rate on one person depends negatively on the earnings of the spouse. This stands in contrast to the previous literature on this question, which has focused on a specific form of positive jointness. The presence of negative jointness is driven by family-based and means-tested transfer programs combined with tax systems that usually feature very little jointness. Second, we consider the labour supply distortion on secondary earners relative to primary earners implied by the current tax-transfer systems, and study the welfare effects of small reforms that change the relative taxation of spouses. By adopting a small-reform methodology, it is possible to set out a simple analysis based on more realistic labour supply models than those considered in the existing literature. We present microsimulations showing that simple revenue-neutral reforms that lower the tax burden on secondary earners are associated with substantial welfare gains in most countries. Finally, we consider the tax-transfer implications of marriage and estimate the so-called marriage penalty. For most countries, we find large marriage penalties at the bottom of the distribution driven primarily by features of the transfer system.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3965.

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Length: 56 pages
Date of creation: Jan 2009
Date of revision:
Handle: RePEc:iza:izadps:dp3965

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Keywords: joint taxation; marriage tax; couples; optimal tax; redistribution; labour supply;

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References

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  1. Marianne P. Bitler & Jonah B. Gelbach & Hilary W. Hoynes & Madeline Zavodny, 2004. "The Impact of Welfare Reform on Marriage and Divorce," Working Papers 110, RAND Corporation Publications Department.
  2. Helmuth Cremer & Jean-Marie Lozachmeur & Pierre Pestieau, 2007. "Income Taxation of Couples and the Tax Unit Choice," CESifo Working Paper Series 2005, CESifo Group Munich.
  3. Blundell, Richard & Macurdy, Thomas, 1999. "Labor supply: A review of alternative approaches," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 27, pages 1559-1695 Elsevier.
  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.
  5. Nada Eissa, 1995. "Taxation and Labor Supply of Married Women: The Tax Reform Act of 1986 as a Natural Experiment," NBER Working Papers 5023, National Bureau of Economic Research, Inc.
  6. Armstrong, Mark & Rochet, Jean-Charles, 1999. "Multi-dimensional screening:: A user's guide," European Economic Review, Elsevier, vol. 43(4-6), pages 959-979, April.
  7. H. W. Hoynes, . "Does welfare play any role in female headship decisions?," Institute for Research on Poverty Discussion Papers 1078-95, University of Wisconsin Institute for Research on Poverty.
  8. Herwig Immervoll & Henrik Jacobsen Kleven & Claus Thustrup Kreiner & Emmanuel Saez, 2005. "Welfare Reform in European Countries: A Microsimulation Analysis," OECD Social, Employment and Migration Working Papers 28, OECD Publishing.
  9. Hilary Williamson Hoynes, 1996. "Work, Welfare, and Family Structure: What Have We Learned?," NBER Working Papers 5644, National Bureau of Economic Research, Inc.
  10. Feenberg, Daniel R. & Rosen, Harvey S., 1995. "Recent Developments in the Marriage Tax," National Tax Journal, National Tax Association, vol. 48(1), pages 91-101, March Cit.
  11. Eissa, Nada & Hoynes, Hilary Williamson, 2004. "Taxes and the labor market participation of married couples: the earned income tax credit," Journal of Public Economics, Elsevier, vol. 88(9-10), pages 1931-1958, August.
  12. Emmanuel Saez & Claus Thustrup Kreiner & Henrik Jacobsen Kleven, 2008. "The Optimal Income Taxation of Couples as a Multi-Dimensional Screening Problem," 2008 Meeting Papers 472, Society for Economic Dynamics.
  13. Michael J. Boskin & Eytan Sheshinski, 1984. "Optimal Tax Treatment of the Family: Married Couples," NBER Working Papers 0368, National Bureau of Economic Research, Inc.
  14. Richard W. Blundell, 1995. "The Impact of Taxation on Labour Force Participation and Labour Supply," OECD Jobs Study Working Papers 8, OECD Publishing.
  15. Herwig Immervoll & Cathal O’Donoghue, 2003. "Employment Transitions in 13 European Countries. Levels, Distributions and Determining Factors of Net Replacement Rates," CESifo Working Paper Series 1091, CESifo Group Munich.
  16. Herwig Immervoll, 2004. "Average and Marginal Effective Tax Rates Facing Workers in the EU: A Micro-Level Analysis of Levels, Distributions and Driving Factors," OECD Social, Employment and Migration Working Papers 19, OECD Publishing.
  17. Alm, James & Whittington, Leslie A, 1999. "For Love or Money? The Impact of Income Taxes on Marriage," Economica, London School of Economics and Political Science, vol. 66(263), pages 297-316, August.
  18. Dickert-Conlin, Stacy & Houser, Scott, 1998. "Taxes and Transfers: A New Look at the Marriage Penalty," National Tax Journal, National Tax Association, vol. 51(n. 2), pages 175-217, June Cita.
  19. Craig Brett, 2007. "Optimal nonlinear taxes for families," International Tax and Public Finance, Springer, vol. 14(3), pages 225-261, June.
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Citations

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Cited by:
  1. Fahn, Matthias, 2011. "Three Essays on Commitment and Information Problems," Munich Dissertations in Economics 13750, University of Munich, Department of Economics.
  2. Olivier Bargain & Mathias Dolls & Dirk Neumann & Sebastian Siegloch & Andreas Peichl, 2011. "Tax-Benefit Systems in Europe and the US: Between Equity and Efficiency," Working Papers 201101, Geary Institute, University College Dublin.
  3. Bargain, Olivier & Orsini, Kristian & Peichl, Andreas, 2011. "Labor Supply Elasticities in Europe and the US," IZA Discussion Papers 5820, Institute for the Study of Labor (IZA).
  4. European Commission, 2011. "Tax Reforms in EU Member States 2011: tax policy challenges for economic growth and fiscal sustainability," Taxation Papers 28, Directorate General Taxation and Customs Union, European Commission.
  5. Immervoll, Herwig & Kleven, Henrik Jacobsen & Kreiner, Claus Thustrup & Verdelin, Nicolaj, 2011. "Optimal tax and transfer programs for couples with extensive labor supply responses," Journal of Public Economics, Elsevier, vol. 95(11), pages 1485-1500.
  6. Eichhorst, Werner & Thode, Eric, 2010. "Report No. 30: Vereinbarkeit von Familie und Beruf 2010," IZA Research Reports 30, Institute for the Study of Labor (IZA).

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