Optimal Taxation of Couples' Incomes with Endogenous Bargaining Power

This paper studies the optimal income taxation for a two-earner household where a couple bargains over private goods consumption and time allocation between market work and leisure. In the model, their bargaining power is endogenously determined by the income gap between male and female earners in the economy. The optimal tax expression obtained in this model shows that the optimal tax rule is characterized by two components: the price distortion consideration (Ramsey tax consideration) and the endogenous bargaining power consideration. Taking account of two household members with different productivity levels in the labor market, our numerical analysis demonstrates that the optimal tax rate for the household member with higher productivity, typically, the member with smaller wage elasticity, is lower if the required tax revenue is relatively small and the in fluence of gender income gap on the power balance of the couple is moderate. This result contrasts with the Ramsey tax rule.