Taxation and the Earnings of Husbands and Wives

Gelber, Alexander (2010): Taxation and the Earnings of Husbands and Wives.

Abstract

This paper examines the response of husbands' and wives' earnings to a tax reform in which husbands' and wives' tax rates changed independently, allowing me to examine the effect of both spouses' incentives on each spouse's behavior. I compare the results to those of more simplified econometric models that are used in the typical setting in which such independent variation is not available. Using administrative panel data on approximately 11% of the married Swedish population, I analyze the impact of the large Swedish tax reform of 1990-1. I find that in response to a compensated fall in one spouse's tax rate, that spouse's earned income rises, and the other spouse's earned income also rises. I test and reject a set of models in which the family maximizes a single utility function. A standard econometric specification, in which one spouse reacts to the other spouse's income as if it were unearned income, yields biased coefficient estimates. Uncompensated elasticities of earned income with respect to the fraction of income kept after taxes are over-estimated by a factor of more than three, and income effects are of the wrong sign. A second common specification, in which overall family income is related to the family's tax rate and income, also yields substantially over-estimated own compensated and uncompensated elasticities. Standard econometric approaches may substantially mis-estimate earnings responses to taxation.

• Item Type: MPRA Paper
• Language: English
• Keywords: taxation; earnings; labor supply; families; spouses; unitary model
• Subjects: H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency ; Optimal Taxation; H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H31 - Household; J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J21 - Labor Force and Employment, Size, and Structure; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H24 - Personal Income and Other Nonbusiness Taxes and Subsidies; J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J22 - Time Allocation and Labor Supply; J - Labor and Demographic Economics > J1 - Demographic Economics > J12 - Marriage ; Marital Dissolution ; Family Structure ; Domestic Abuse; J - Labor and Demographic Economics > J1 - Demographic Economics > J16 - Economics of Gender ; Non-labor Discrimination

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