The present paper examines the efficiency and revenue effects of several alternative tax treatments of two earner families using estimates of the compensated elasticities of the labor supply of married women based on the experience with the 1986 tax rate reductions. The analysis of alternatives is based on the NBER TAXSIM model which has been modified to incorporate separate estimates of the earnings of spouses. The marginal tax rates explicitly incorporate the Social Security payroll taxes net of the present actuarial value of future retirement benefits. Three general conclusions emerge in this paper. First, the existing high marginal tax rates on married women cause big eadweight losses that can be reduced by alternative tax rules that lower marginal tax rates. Second, the behavioral responses to the lower marginal tax rates induce additional tax payments that offset large fractions of the 'static' revenue losses. Third, there are substantial differences in cost- effectiveness among these options, i.e. in the revenue cost per dollar of reduced deadweight loss. Several of the options are sufficiently cost- effective that they could probably be combined with other ways of raising revenue to produce a net reduction in the deadweight loss of the tax system as a whole. We are aware, however, that the current framework is very restrictive in three ways. It ignores the response of the primary earner to any change in tax rates on spousal income. It defines the labor supply response narrowly in terms of participation and hours, excluding other dimensions of labor supply. Taxes affect not only the labor supply of men and women but also change taxable income through changes in excluded income and deductions. These changes in taxable income are the key variable for influencing tax revenue and the deadweight loss of alternative tax rules.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
5155.
Length: Date of creation: Jun 1995 Date of revision: Publication status: published relationship to a non-chapter. This should not happen. Please contact NBER. Handle: RePEc:nbr:nberwo:5155
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Chapter
Martin Feldstein & Daniel R. Feenberg, 1996.
"The Taxation of Two-Earner Families,"
NBER Chapters,
in: Empirical Foundations of Household Taxation, pages 39-75
National Bureau of Economic Research, Inc.
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Find related papers by JEL classification: H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Arnold Harberger, 1964.
"Taxation, Resource Allocation, and Welfare,"
NBER Chapters,
in: The Role of Direct and Indirect Taxes in the Federal Reserve System, pages 25-80
National Bureau of Economic Research, Inc.
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Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)
Patricia Apps & Ray Rees, 2007.
"The Taxation of Couples,"
Discussion Papers
07/21, Department of Economics, University of York.
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Other versions:
Patricia Apps & Ray Rees, 2007.
"The Taxation of Couples,"
CEPR Discussion Papers
559, Centre for Economic Policy Research, Research School of Social Sciences, Australian National University.
[Downloadable!]