The Optimal Taxation of Couples

Research Question. What is the optimal joint nonlinear earnings tax schedule for married couples? How should one spouse’s marginal tax rate depend on the other’s earnings? When is individual earnings-based (separable) taxation optimal versus family-income-based taxation, and what determines the sign and magnitude of “jointness” — the dependence of one spouse’s marginal tax on the other’s earnings?

Model. The paper studies a canonical unitary household model in which each couple consists of two spouses who jointly maximize utility subject to a joint budget constraint. Spousal productivities are drawn from a joint distribution F with arbitrary dependence structure. The planner maximizes a weighted sum of couples’ utilities, with Pareto weights that are decreasing functions of productivities. Utility takes a quasi-linear form in consumption and labor disutility with constant labor supply elasticity parameter γ (implying earnings elasticity γ/(γ-1)). The tax problem is equivalent to a two-dimensional mechanism design problem in which the planner chooses allocations as functions of reported productivity types, subject to incentive compatibility and budget feasibility. Because spousal productivities are two-dimensional, the problem is a multi-dimensional screening problem whose properties are poorly understood in general.

Ilia Krasikov | Macro Paper Warehouse

The Optimal Taxation of Couples