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

  • Henrik Jacobsen Kleven
  • Claus Thustrup Kreiner
  • Emmanuel Saez

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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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2092.

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Date of creation: 2007
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Handle: RePEc:ces:ceswps:_2092
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  1. John Piggott & John Whalley, 1994. "The Tax Unit and Household Production," NBER Working Papers 4820, National Bureau of Economic Research, Inc.
  2. Blundell, Richard & Macurdy, Thomas, 1999. "Labor supply: A review of alternative approaches," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 27, pages 1559-1695 Elsevier.
  3. Michael J. Boskin & Eytan Sheshinski, 1979. "Optimal Tax Treatment of the Family: Married Couples," NBER Working Papers 0368, National Bureau of Economic Research, Inc.
  4. CREMER, Helmuth & PESTIEAU , Pierre & ROCHET, Jean-Charles, . "Direct versus indirect taxation: the design of the tax structure revisited," CORE Discussion Papers RP 1528, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Armstrong, Mark, 2006. "Price discrimination," MPRA Paper 4693, University Library of Munich, Germany.
  6. 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, vol. 66(263), pages 297-316, August.
  7. Helmuth Cremer & Jean-Marie Lozachmeur & Pierre Pestieau, 2012. "Income taxation of couples and the tax unit choice," Journal of Population Economics, Springer;European Society for Population Economics, vol. 25(2), pages 763-778, January.
  8. J. A. Mirrlees, 1976. "Optimal Tax Theory: A Synthesis," Working papers 176, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Wilson, Robert, 1997. "Nonlinear Pricing," OUP Catalogue, Oxford University Press, number 9780195115826, December.
  10. John Vickers & Mark Armstrong, 2006. "Competitive Nonlinear Pricing and Bundling," Economics Series Working Papers 281, University of Oxford, Department of Economics.
  11. Craig Brett, 2007. "Optimal nonlinear taxes for families," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 14(3), pages 225-261, June.
  12. Armstrong, M., 1996. "Price discrimination by a many-product firm," Discussion Paper Series In Economics And Econometrics 9628, Economics Division, School of Social Sciences, University of Southampton.
  13. 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.
  14. Armstrong, Mark & Rochet, Jean-Charles, 1999. "Multi-dimensional screening:: A user's guide," European Economic Review, Elsevier, vol. 43(4-6), pages 959-979, April.
  15. Roger B. Myerson, 1988. "Mechanism Design," Discussion Papers 796, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  16. Armstrong, Mark & Vickers, John, 2001. "Competitive Price Discrimination," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 579-605, Winter.
  17. Chiappori, Pierre-Andre, 1988. "Rational Household Labor Supply," Econometrica, Econometric Society, vol. 56(1), pages 63-90, January.
  18. Armstrong, Mark, 1996. "Multiproduct Nonlinear Pricing," Econometrica, Econometric Society, vol. 64(1), pages 51-75, January.
  19. Shelly Lundberg & Robert A. Pollak, 1996. "Bargaining and Distribution in Marriage," Journal of Economic Perspectives, American Economic Association, vol. 10(4), pages 139-158, Fall.
  20. McAfee, R. Preston & McMillan, John, 1988. "Multidimensional incentive compatibility and mechanism design," Journal of Economic Theory, Elsevier, vol. 46(2), pages 335-354, December.
  21. Emmanuel Saez, 2002. "Optimal Income Transfer Programs: Intensive versus Extensive Labor Supply Responses," The Quarterly Journal of Economics, Oxford University Press, vol. 117(3), pages 1039-1073.
  22. Schroyen, Fred, 2003. "Redistributive taxation and the household: the case of individual filings," Journal of Public Economics, Elsevier, vol. 87(11), pages 2527-2547, October.
  23. Emmanuel Saez, 2001. "Using Elasticities to Derive Optimal Income Tax Rates," Review of Economic Studies, Oxford University Press, vol. 68(1), pages 205-229.
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