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The Optimal Income Taxation of Couples as a Multi-Dimensional Screening Problem

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  • Emmanuel Saez

    (UC Berkeley)

  • Claus Thustrup Kreiner

    (University of Copenhagen)

  • Henrik Jacobsen Kleven

    (London School of Economics)

Abstract

This paper explores the optimal income tax treatment of couples. Each couple is modelled as a single agent supplying labor along two dimensions: primary-earner and secondary-earner labor supply. We consider fully general nonlinear income tax schedules which creates a multi-dimensional screening problem. We prove that, under regularity and separability assumptions for utility functions and for a wide class of social welfare functions, optimal tax schemes display negative jointness such that the tax rate on one person decreases in the earnings of the spouse. We also show that the tax on the secondary earner tends to zero asymptotically as the earnings of the primary earner becomes large. These results are valid both in models where secondary earners make only a binary labor supply choice (work or not work), and in models where both spouses make continuous labor supply decisions. In the latter case and in contrast to the multi-dimensional screening monopoly model, the optimal tax system is regular everywhere with no bunching for a wide set of parameters.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 472.

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Date of creation: 2008
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Handle: RePEc:red:sed008:472

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  1. Armstrong, Mark & Rochet, Jean-Charles, 1999. "Multi-dimensional screening:: A user's guide," European Economic Review, Elsevier, Elsevier, vol. 43(4-6), pages 959-979, April.
  2. Richard Blundell & Thomas MaCurdy, 1998. "Labour supply: a review of alternative approaches," IFS Working Papers, Institute for Fiscal Studies W98/18, Institute for Fiscal Studies.
  3. Henrik Jacobsen Kleven & Claus Thustrup Kreiner & Emmanuel Saez, 2009. "The Optimal Income Taxation of Couples," Econometrica, Econometric Society, Econometric Society, vol. 77(2), pages 537-560, 03.
  4. 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, London School of Economics and Political Science, vol. 66(263), pages 297-316, August.
  5. Schroyen, Fred, 2003. "Redistributive taxation and the household: the case of individual filings," Journal of Public Economics, Elsevier, Elsevier, vol. 87(11), pages 2527-2547, October.
  6. Michael J. Boskin & Eytan Sheshinski, 1979. "Optimal Tax Treatment of the Family: Married Couples," NBER Working Papers 0368, National Bureau of Economic Research, Inc.
  7. Helmuth Cremer & Jean-Marie Lozachmeur & Pierre Pestieau, 2012. "Income taxation of couples and the tax unit choice," Journal of Population Economics, Springer, Springer, vol. 25(2), pages 763-778, January.
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  9. Mark Armstrong & John Vickers, 2010. "Competitive Non-linear Pricing and Bundling," Review of Economic Studies, Oxford University Press, vol. 77(1), pages 30-60.
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  11. Wilson, Robert, 1997. "Nonlinear Pricing," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780195115826, October.
  12. Saez, Emmanuel, 2001. "Using Elasticities to Derive Optimal Income Tax Rates," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 68(1), pages 205-29, January.
  13. Armstrong, Mark, 2006. "Price discrimination," MPRA Paper 4693, University Library of Munich, Germany.
  14. Emmanuel Saez, 2002. "Optimal Income Transfer Programs: Intensive Versus Extensive Labor Supply Responses," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(3), pages 1039-1073, August.
  15. CREMER, Helmuth & PESTIEAU, Pierre & ROCHET, Jean-Charles, 1999. "Direct versus indirect taxation: the design of the tax structure revisited," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 1999010, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  16. Roger B. Myerson, 1988. "Mechanism Design," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 796, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  17. McAfee, R. Preston & McMillan, John, 1988. "Multidimensional incentive compatibility and mechanism design," Journal of Economic Theory, Elsevier, Elsevier, vol. 46(2), pages 335-354, December.
  18. Craig Brett, 2007. "Optimal nonlinear taxes for families," International Tax and Public Finance, Springer, Springer, vol. 14(3), pages 225-261, June.
  19. Armstrong, Mark & Vickers, John, 2001. "Competitive Price Discrimination," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 579-605, Winter.
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  21. Piggott, John & Whalley, John, 1996. "The Tax Unit and Household Production," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 104(2), pages 398-418, April.
  22. Shelly Lundberg & Robert A. Pollak, 1996. "Bargaining and Distribution in Marriage," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 10(4), pages 139-158, Fall.
  23. Rochet, Jean-Charles, 1987. "A necessary and sufficient condition for rationalizability in a quasi-linear context," Journal of Mathematical Economics, Elsevier, vol. 16(2), pages 191-200, April.
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Cited by:
  1. Rolf Aaberge & Ugo Colombino, 2011. "Empirical Optimal Income Taxation: A Microeconometric Application to Norway," CHILD Working Papers, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY wp16_11, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY.
  2. Rolf Aaberge & Ugo Colombino, 2008. "Designing Optimal Taxes with a Microeconometric Model of Household Labour Supply," ICER Working Papers, ICER - International Centre for Economic Research 19-2008, ICER - International Centre for Economic Research.
  3. 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, Elsevier, vol. 95(11), pages 1485-1500.
  4. Herwig Immervoll & Henrik Jacobsen Kleven & Claus Thustrup Kreiner & Nicolaj Verdelin, 2009. "An Evaluation of the Tax-Transfer Treatment of Married Couples in European Countries," OECD Social, Employment and Migration Working Papers, OECD Publishing 76, OECD Publishing.
  5. M. Fort & N. Schneeweis & R. Winter-Ebmer, 2011. "More Schooling, More Children: Compulsory Schooling Reforms and Fertility in Europe," Working Papers, Dipartimento Scienze Economiche, Universita' di Bologna wp787, Dipartimento Scienze Economiche, Universita' di Bologna.

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