Optimal tax and transfer programs for couples with extensive labor supply responses

TY - JOUR

T1 - Optimal tax and transfer programs for couples with extensive labor supply responses

AU - Immervoll, Herwig

AU - Kleven, Henrik Jacobsen

AU - Kreiner, Claus Thustrup

AU - Verdelin, Nicolaj

PY - 2011/12

Y1 - 2011/12

N2 - This paper analyzes the optimal design of general nonlinear tax-transfer schedules for couples under unitary and collective approaches to family decision making. We consider a double-extensive model of labor supply where each spouse makes a labor force participation choice for given hours of work. We present simple and intuitive optimal tax rules that generalize existing findings on the optimal taxation of single-person households with extensive responses (Saez, 2002) to the case of two-person households with double-extensive responses. Without income effects on labor supply, optimal tax rules as a function of sufficient statistics are the same under the unitary and collective approaches. With income effects on labor supply, optimal tax rules under the two approaches continue to depend on the same sufficient statistics, but the collective model features an additional Pigouvian term arising from a within-family participation externality. Finally, we present microsimulations of tax reform for 15 European countries suggesting that a reduction of tax rates on secondary earners relative to primary earners is associated with strong welfare gains in all countries.

AB - This paper analyzes the optimal design of general nonlinear tax-transfer schedules for couples under unitary and collective approaches to family decision making. We consider a double-extensive model of labor supply where each spouse makes a labor force participation choice for given hours of work. We present simple and intuitive optimal tax rules that generalize existing findings on the optimal taxation of single-person households with extensive responses (Saez, 2002) to the case of two-person households with double-extensive responses. Without income effects on labor supply, optimal tax rules as a function of sufficient statistics are the same under the unitary and collective approaches. With income effects on labor supply, optimal tax rules under the two approaches continue to depend on the same sufficient statistics, but the collective model features an additional Pigouvian term arising from a within-family participation externality. Finally, we present microsimulations of tax reform for 15 European countries suggesting that a reduction of tax rates on secondary earners relative to primary earners is associated with strong welfare gains in all countries.

U2 - 10.1016/j.jpubeco.2011.06.005

DO - 10.1016/j.jpubeco.2011.06.005

M3 - Journal article

SN - 0047-2727

VL - 95

SP - 1485

EP - 1500

JO - Journal of Public Economics

JF - Journal of Public Economics

IS - 11-12

ER -