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

Herwig Immervoll, Henrik Jacobsen Kleven, Claus Thustrup Kreiner, Nicolaj Verdelin

Research output: Contribution to journalArticlepeer-review

26 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)1485-1500
Number of pages16
JournalJournal of Public Economics
Volume95
Issue number11-12
DOIs
StatePublished - Dec 2011
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

Keywords

  • Collective model
  • Couples
  • Extensive labor supply responses
  • Optimal taxation
  • Tax reform
  • Unitary model

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