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An evaluation of the tax-transfer treatment of married couples in European countries

  • Immervoll, Herwig
  • Kleven, Henrik Jacobsen
  • Kreiner, Claus Thustrup
  • Verdelin, Nicolaj

This paper presents an evaluation of the tax-transfer treatment of married couples in 15 EU countries using the EUROMOD microsimulation model. First, we show that many tax-transfer schemes in Europe feature negative jointness defined as a situation where the tax rate on one person depends negatively on the earnings of the spouse. This stands in contrast to the previous literature on this question, which has focused on a specific form of positive jointness. The presence of negative jointness is driven by family-based and means-tested transfer programs combined with tax systems that usually feature very little jointness. Second, we consider the labor supply distortion on secondary earners relative to primary earners implied by the current tax-transfer systems, and study the welfare effects of small reforms that change the relative taxation of spouses. By adopting a small-reform methodology, it is possible to set out a simple analysis based on more realistic labor supply models than those considered in the existing literature. We present microsimulations showing that simple revenue-neutral reforms that lower the tax burden on secondary earners are associated with substantial welfare gains in most countries. Finally, we consider the tax-transfer implications of marriage and estimate the so-called marriage penalty. For most countries, we find large marriage penalties at the bottom of the distribution driven primarily by features of the transfer system.

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Paper provided by EUROMOD at the Institute for Social and Economic Research in its series EUROMOD Working Papers with number EM7/08.

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Date of creation: 01 Sep 2008
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Publication status: published
Handle: RePEc:ese:emodwp:em7-08
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  1. Immervoll, Herwig & Kleven, Henrik Jacobsen & Kreiner, Claus Thustrup & Saez, Emmanuel, 2005. "Welfare Reform in European Countries: A Microsimulation Analysis," IZA Discussion Papers 1810, Institute for the Study of Labor (IZA).
  2. 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.
  3. Craig Brett, 2007. "Optimal nonlinear taxes for families," International Tax and Public Finance, Springer, vol. 14(3), pages 225-261, June.
  4. Hilary Williamson Hoynes, 1995. "Does Welfare Play Any Role in Female Headship Decisions?," NBER Working Papers 5149, National Bureau of Economic Research, Inc.
  5. Helmuth Cremer & Jean-Marie Lozachmeur & Pierre Pestieau, 2007. "Income Taxation of Couples and the Tax Unit Choice," CESifo Working Paper Series 2005, CESifo Group Munich.
  6. Daniel R. Feenberg & Harvey S. Rosen, 1994. "Recent Developments in the Marriage Tax," NBER Working Papers 4705, National Bureau of Economic Research, Inc.
  7. Emmanuel Saez, 2000. "Optimal Income Transfer Programs: Intensive Versus Extensive Labor Supply Responses," NBER Working Papers 7708, National Bureau of Economic Research, Inc.
  8. 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.
  9. 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.
  10. Emmanuel Saez & Claus Thustrup Kreiner & Henrik Jacobsen Kleven, 2008. "The Optimal Income Taxation of Couples as a Multi-Dimensional Screening Problem," 2008 Meeting Papers 472, Society for Economic Dynamics.
  11. Hilary Williamson Hoynes, 1996. "Work, Welfare, and Family Structure: What Have We Learned?," NBER Working Papers 5644, National Bureau of Economic Research, Inc.
  12. Herwig Immervoll, 2004. "Average and Marginal Effective Tax Rates Facing Workers in the EU: A Micro-Level Analysis of Levels, Distributions and Driving Factors," OECD Social, Employment and Migration Working Papers 19, OECD Publishing.
  13. Dickert-Conlin, Stacy & Houser, Scott, 1998. "Taxes and Transfers: A New Look at the Marriage Penalty," National Tax Journal, National Tax Association, vol. 51(n. 2), pages 175-217, June.
  14. Nada Eissa, 1995. "Taxation and Labor Supply of Married Women: The Tax Reform Act of 1986 as a Natural Experiment," NBER Working Papers 5023, National Bureau of Economic Research, Inc.
  15. 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.
  16. Herwig Immervoll & Cathal O’Donoghue, 2003. "Employment Transitions in 13 European Countries. Levels, Distributions and Determining Factors of Net Replacement Rates," CESifo Working Paper Series 1091, CESifo Group Munich.
  17. Marianne P. Bitler & Jonah B. Gelbach & Hilary W. Hoynes & Madeline Zavodny, 2004. "The Impact of Welfare Reform on Marriage and Divorce," Working Papers 110, RAND Corporation Publications Department.
  18. Eissa, Nada & Hoynes, Hilary Williamson, 2004. "Taxes and the labor market participation of married couples: the earned income tax credit," Journal of Public Economics, Elsevier, vol. 88(9-10), pages 1931-1958, August.
  19. Richard W. Blundell, 1995. "The Impact of Taxation on Labour Force Participation and Labour Supply," OECD Jobs Study Working Papers 8, OECD Publishing.
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