Optimal Family Taxation and Income Inequality

36 Pages Posted: 3 Feb 2017

See all articles by Patricia F. Apps

Patricia F. Apps

The University of Sydney Law School; IZA Institute of Labor Economics

Ray Rees

Ludwig Maximilian University of Munich - Faculty of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: February 2, 2017

Abstract

This paper presents the properties of optimal piecewise linear income tax systems for families based on joint and individual incomes respectively. It models the interaction between the wage rates of mothers as "second earners" and variation in child care prices and productivities as determinants of across-household heterogeneity in second earner labour supply. We find that individual taxation welfare dominates joint taxation not only on the well-known grounds of efficiency but also of equity. An important driver of this result is the sharp rise in wage rates in the top percentiles of the primary wage distribution. In addition to reducing the intra-household net-of-tax wage gap, individual taxation removes the opportunity for tax avoidance income splitting makes available to high wage primary earners, leading to a much fairer distribution of the tax burden.

Keywords: Optimal taxation, piecewise linear, labour supply, child care, inequality

JEL Classification: D13, D31, H21, H24, H31, J13, J16, J22, J24, J38, K34

Suggested Citation

Apps, Patricia F. and Rees, Ray, Optimal Family Taxation and Income Inequality (February 2, 2017). Sydney Law School Research Paper No. 17/09. Available at SSRN: https://ssrn.com/abstract=2910797 or http://dx.doi.org/10.2139/ssrn.2910797

Patricia F. Apps (Contact Author)

The University of Sydney Law School ( email )

Faculty of Law, New Law Building F10
The University of Sydney
Sydney, NSW 2006
Australia
+61 2 9351 0241 (Phone)
+61 2 9351 0200 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Ray Rees

Ludwig Maximilian University of Munich - Faculty of Economics ( email )

Munich, D-80539
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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