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

Immervoll, Herwig, Kleven, Henrik Jacobsen, Kreiner, Claus Thustrup and Verdelin, Nicolaj (2011) Optimal tax and transfer programs for couples with extensive labor supply responses. Journal of Public Economics, 95 (11-12). pp. 1485-1500. ISSN 0047-2727

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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.

Item Type: Article
Official URL: http://www.elsevier.com/wps/find/journaldescriptio...
Additional Information: © 2011 Elsevier
Library of Congress subject classification: H Social Sciences > HJ Public Finance
Sets: Departments > Economics
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 02 Sep 2011 12:29
URL: http://eprints.lse.ac.uk/38075/

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