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The Taxation of Two-Earner Families

In: Empirical Foundations of Household Taxation

  • Martin Feldstein
  • Daniel R. Feenberg

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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This chapter was published in:
  • Martin Feldstein & James M. Poterba, 1996. "Empirical Foundations of Household Taxation," NBER Books, National Bureau of Economic Research, Inc, number feld96-1, December.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 6236.
    Handle: RePEc:nbr:nberch:6236
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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    1. Martin Feldstein, 1999. "Tax Avoidance And The Deadweight Loss Of The Income Tax," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 674-680, November.
    2. Harvey S. Rosen, 1987. "The Marriage Tax is Down But Not Out," NBER Working Papers 2231, National Bureau of Economic Research, Inc.
    3. Robert K. Triest, 1990. "The Effect of Income Taxation on Labor Supply in the United States," Journal of Human Resources, University of Wisconsin Press, vol. 25(3), pages 491-516.
    4. Martin Feldstein & Andrew Samwick, 1992. "Social Security Rules and Marginal Tax Rates," NBER Working Papers 3962, National Bureau of Economic Research, Inc.
    5. Hausman, Jerry & Ruud, Paul, 1984. "Family Labor Supply with Taxes," American Economic Review, American Economic Association, vol. 74(2), pages 242-48, May.
    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. Browning, Edgar K, 1987. "On the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, vol. 77(1), pages 11-23, March.
    8. 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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