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The Taxation of Two-Earner Families

In: Empirical Foundations of Household Taxation

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  • Martin Feldstein
  • Daniel R. Feenberg

Abstract

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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Suggested Citation

  • 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.
  • Handle: RePEc:nbr:nberch:6236
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    References listed on IDEAS

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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. Boskin, Michael J. & Sheshinski, Eytan, 1983. "Optimal tax treatment of the family: Married couples," Journal of Public Economics, Elsevier, vol. 20(3), pages 281-297, April.
    3. Feldstein, Martin & Samwick, Andrew A., 1992. "Social Security Rules and Marginal Tax Rates," National Tax Journal, National Tax Association;National Tax Journal, vol. 45(1), pages 1-22, March.
    4. Browning, Edgar K, 1987. "On the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, vol. 77(1), pages 11-23, March.
    5. Harvey S. Rosen, 1987. "The Marriage Tax is Down But Not Out," NBER Working Papers 2231, National Bureau of Economic Research, Inc.
    6. 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.
    7. 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.
    8. Hausman, Jerry & Ruud, Paul, 1984. "Family Labor Supply with Taxes," American Economic Review, American Economic Association, vol. 74(2), pages 242-248, May.
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    Citations

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    Cited by:

    1. Apps, Patricia & Rees, Ray, 2007. "The Taxation of Couples," IZA Discussion Papers 2910, Institute for the Study of Labor (IZA).
    2. William M. Gentry & Alison P. Hagy, 1996. "The Distributional Effects of the Tax Treatment of Child Care Expenses," NBER Chapters,in: Empirical Foundations of Household Taxation, pages 99-134 National Bureau of Economic Research, Inc.
    3. Apps, Patricia & Rees, Ray, 2012. "Optimal Taxation, Child Care and Models of the Household," IZA Discussion Papers 6823, Institute for the Study of Labor (IZA).
    4. Apps, Patricia & Rees, Ray, 1999. "On the taxation of trade within and between households," Journal of Public Economics, Elsevier, vol. 73(2), pages 241-263, August.
    5. Anca Cotet, 2009. "Death And Taxes: The Impact Of Progressive Taxation On Health," Working Papers 200903, Ball State University, Department of Economics, revised Mar 2009.
    6. Volker Meier & Matthias Wrede, 2013. "Reducing the excess burden of subsidizing the stork: joint taxation, individual taxation, and family tax splitting," Journal of Population Economics, Springer;European Society for Population Economics, vol. 26(3), pages 1195-1207, July.
    7. Patricia Apps & Ray Rees, 2016. "Optimal Taxation, Income Inequality and the Household," CESifo Working Paper Series 5845, CESifo Group Munich.
    8. Yuri Andrienko & Patricia Apps & Ray Rees, 2015. "Gender Bias in Tax Systems Based on Household Income," Annals of Economics and Statistics, GENES, issue 117-118, pages 141-155.
    9. Seonglim Lee & Jinkook Lee & Yunhee Chang, 2011. "What is the Cost of Married Women's Paid Work?," Working Papers WR-830, RAND Corporation.
    10. Andrew Mitrusi & James Poterba, 2000. "The Distribution of Payroll and Income Tax Burdens, 1979-1999," NBER Working Papers 7707, National Bureau of Economic Research, Inc.

    More about this item

    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

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