The Optimal Income Taxation of Couples

Authors

  • Henrik Jacobsen Kleven,

    1. Dept. of Economics, London School of Economics, Houghton Street, London WC2A 2AE, U.K. and Economic Policy Research Unit, Dept. of Economics, University of Copenhagen, Copenhagen, Denmark and Centre for Economic Policy Research, London, U.K.; h.j.kleven@lse.ac.uk
    Search for more papers by this author
  • Claus Thustrup Kreiner,

    1. Dept. of Economics, University of Copenhagen, Studiestraede 6, # 1455 Copenhagen, Denmark and Economic Policy Research Unit, Dept. of Economics, University of Copenhagen, Copenhagen, Denmark and CESifo, Munich, Germany
    Search for more papers by this author
  • Emmanuel Saez

    1. Dept. of Economics, University of California–Berkeley, 549 Evans Hall 3880, Berkeley, CA 94720, U.S.A. and NBER; saez@econ.berkeley.edu
    Search for more papers by this author
    • We thank the co-editor, Mark Armstrong, Richard Blundell, Mike Brewer, Raj Chetty, Steven Durlauf, Nada Eissa, Kenneth Judd, Botond Koszegi, Etienne Lehmann, Randall Mariger, Jean-Charles Rochet, Andrew Shephard, four anonymous referees, and numerous seminar and conference participants for very helpful comments and discussions. Financial support from NSF Grant SES-0134946 and an Economic Policy Research Network (EPRN) Grant is gratefully acknowledged.


Abstract

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.

Ancillary