The Optimal Income Taxation of Couples

TY - JOUR

T1 - The Optimal Income Taxation of Couples

AU - Kleven, Henrik Jacobsen

AU - Kreiner, Claus Thustrup

AU - Saez, Emmanuel

PY - 2009

Y1 - 2009

N2 - This paper analyzes the general nonlinear optimal income tax for couples, a multidimensional screening problem. Each couple consists of a primary earner who always participates in the labor market, but makes an hours-of-work choice, and a secondary earner who chooses whether or not to work. If second-earner participation is a signal of the couple being better (worse) off, we prove that optimal tax schemes display a positive tax (subsidy) on secondary earnings and that the tax (subsidy) on secondary earnings decreases with primary earnings and converges to zero asymptotically. We present calibrated microsimulations for the United Kingdom showing that decreasing tax rates on secondary earnings is quantitatively significant and consistent with actual income tax and transfer programs.

AB - This paper analyzes the general nonlinear optimal income tax for couples, a multidimensional screening problem. Each couple consists of a primary earner who always participates in the labor market, but makes an hours-of-work choice, and a secondary earner who chooses whether or not to work. If second-earner participation is a signal of the couple being better (worse) off, we prove that optimal tax schemes display a positive tax (subsidy) on secondary earnings and that the tax (subsidy) on secondary earnings decreases with primary earnings and converges to zero asymptotically. We present calibrated microsimulations for the United Kingdom showing that decreasing tax rates on secondary earnings is quantitatively significant and consistent with actual income tax and transfer programs.

KW - Faculty of Social Sciences

KW - multidimensional screening

U2 - 10.3982/ECTA7343

DO - 10.3982/ECTA7343

M3 - Journal article

SN - 0012-9682

VL - 77

SP - 537

EP - 560

JO - Econometrica

JF - Econometrica

IS - 2

ER -