From Joint to Individual: The Distributional and Labour Supply Effect of Tax Individualisation in Ireland

This paper evaluates the redistributive and labour supply effects of transitioning from a joint to a fully individualised income tax system in Ireland. The current Irish tax system, which remains partially joint since the early 2000’s, provides a financial advantage to married couples by allowing them to to share tax bands and credits. However, it also creates a financial disincentive for secondary earners (who are typically women) to work. Using the microsimulation model, SWITCH, we estimate the distributional effect of moving to a fully individualised tax system in Ireland. We find that this would result in income losses, which increase with the level of income. Linking SWITCH to a discrete choice labour supply model, we then estimate the behavioural response of married couples to a fully individualised tax regime. We find that a shift to individualised taxation would result in increased labour supply of married women, and a reduction in the hours worked by married men due to intra-household labour substitution effects. We explore the implications of this for a range of outcomes linked to womens’ financial independence.