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Tax filing choices for the household under separable spheres bargaining

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  • Costa, Carlos Eugênio da
  • Diniz, Érica

Abstract

If household choices can be rationalized by the maximization of a well defined utility function, allowing spouses to file individually or jointly is equivalent to offering the envelope of the two tax schedules. If, instead, household ’preferences’ are constantly being redefined through bargaining, the option to file separately may affect outcomes even if it is never chosen. We use Lundberg and Pollak’s (1993) separate spheres bargaining model to assess the impact of filing options on the outcomes of primary and secondary earners. Threat points of the household’s bargain are given for each spouse by the utility that he or she attains as a follower of a counter-factual off-equilibrium Stackelberg game played by the couple. For a benchmark tax system which treats a couple’s average taxable income as if it were that of a single individual, we prove that if choices are not at kinks, allowing couples to choose whether to file jointly or individually usually benefits the secondary earner. In our numeric exercises this is also the case when choices are at kinks as well. These findings are, however, quite sensitive to the details of the tax system, as made evident by the examination of an alternative tax system.

Suggested Citation

  • Costa, Carlos Eugênio da & Diniz, Érica, 2012. "Tax filing choices for the household under separable spheres bargaining," FGV/EPGE Economics Working Papers (Ensaios Economicos da EPGE) 733, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  • Handle: RePEc:fgv:epgewp:733
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    References listed on IDEAS

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    1. Gordon, Roger H. & Varian, Hal R., 1989. "Taxation of asset income in the presence of a world securities market," Journal of International Economics, Elsevier, vol. 26(3-4), pages 205-226, May.
    2. Robert A. Pollak, 2011. "Family Bargaining and Taxes: A Prolegomenon to the Analysis of Joint Taxation ," CESifo Economic Studies, CESifo, vol. 57(2), pages 216-244, June.
    3. Alberto Alesina & Andrea Ichino & Loukas Karabarbounis, 2011. "Gender-Based Taxation and the Division of Family Chores," American Economic Journal: Economic Policy, American Economic Association, vol. 3(2), pages 1-40, May.
    4. Paul A. Samuelson, 1956. "Social Indifference Curves," The Quarterly Journal of Economics, Oxford University Press, vol. 70(1), pages 1-22.
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