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Optimal Taxation, Income Inequality and the Household

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  • Patricia Apps
  • Ray Rees

Abstract

This paper analyses optimal piecewise linear tax systems for two-earner households, based on joint and individual incomes respectively. It models the interaction between wage rates and variation in child care prices and productivities as determinants of across-household heterogene- ity in second earner labour supply. We find that individual taxation is welfare-superior to joint taxation in models that match the data on empirical wage distributions, on grounds of both efficiency and equity. The main reason for this is the inequity created by income splitting in the presence of a high degree of inequality in the primary earner wage distribution.

Suggested Citation

  • Patricia Apps & Ray Rees, 2016. "Optimal Taxation, Income Inequality and the Household," CESifo Working Paper Series 5845, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_5845
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    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp5845.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    optimal taxation; labour supply; child care; household production; inequality;

    JEL classification:

    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • D13 - Microeconomics - - Household Behavior - - - Household Production and Intrahouse Allocation

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