Taxation and Household Decisions: an Intertemporal Analysis

How do different income taxation systems affect household decisions and welfare? We answer this question by first documenting the strong labor supply disincentives for secondary earners of the U.S. tax system and by using variations from the Bush Tax Cuts to assess their effects on intra-household specialization. We then develop a lifecycle model incorporating labor supply, marriage and divorce decisions with limited commitment, household production, human capital accumulation, and assortative mating. After estimating and validating the model with various datasets, we evaluate four tax systems: a U.S.-like income-splitting system, an individual taxation system, a flexible general joint system, and an income-splitting system with secondary-earner deductions. We find that the individual taxation system provides higher welfare than income splitting but increases inequality. The general joint system offers the highest welfare but is complex to implement. The income-splitting system with a secondary-earner deduction improves welfare and reduces inequality while maintaining simplicity.