The Optimal Income Taxation of Couples as a Multi-Dimensional Screening Problem

56 Pages Posted: 20 Sep 2007

See all articles by Henrik Jacobsen Kleven

Henrik Jacobsen Kleven

University of Copenhagen - Economic Policy Research Unit (EPRU)

Claus Thustrup Kreiner

University of Copenhagen - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Emmanuel Saez

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: September 2007

Abstract

This paper explores the optimal income tax treatment of couples. Each couple is modelled as a single agent supplying labor along two dimensions: primary-earner and secondary-earner labor supply. We consider fully general nonlinear income tax schedules which creates a multi-dimensional screening problem. We prove that, under regularity and separability assumptions for utility functions and for a wide class of social welfare functions, optimal tax schemes display negative jointness such that the tax rate on one person decreases in the earnings of the spouse. We also show that the tax on the secondary earner tends to zero asymptotically as the earnings of the primary earner becomes large. These results are valid both in models where secondary earners make only a binary labor supply choice (work or not work), and in models where both spouses make continuous labor supply decisions. In the latter case and in contrast to the multi-dimensional screening monopoly model, the optimal tax system is regular everywhere with no bunching for a wide set of parameters.

JEL Classification: H21, H31

Suggested Citation

Kleven, Henrik Jacobsen and Kreiner, Claus Thustrup and Saez, Emmanuel, The Optimal Income Taxation of Couples as a Multi-Dimensional Screening Problem (September 2007). CESifo Working Paper Series No. 2092, Available at SSRN: https://ssrn.com/abstract=1015734 or http://dx.doi.org/10.2139/ssrn.1015734

Henrik Jacobsen Kleven

University of Copenhagen - Economic Policy Research Unit (EPRU) ( email )

University of Copenhagen, Building 26
Øster Farimagsgade 5
Copenhagen K., DK-1353
Denmark
+45 35 32 44 15 (Phone)
+45 35 32 30 00 (Fax)

Claus Thustrup Kreiner

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark
+45 35 32 30 20 (Phone)
+45 35 32 30 00 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Emmanuel Saez (Contact Author)

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
510-642-4631 (Phone)
510-642-6615 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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