Until Taxes Do Us Part: Tax Penalties or Bonuses and the Marriage Decision

23 Pages Posted: 11 Jan 2018

See all articles by Francesca Barigozzi

Francesca Barigozzi

Università di Bologna

Helmuth Cremer

University of Toulouse (GREMAQ & IDEI); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Kerstin Roeder

University of Augsburg

Date Written: November 21, 2017

Abstract

The tax regimes applied to couples in many countries including the US, France, and Germany imply either a marriage penalty or a marriage bonus. We study how they affect the decision to get married by considering two potential spouses who play a marriage proposal game. At the end of the game they may get married, live together without formal marriage, or split up. In this signaling game, proposing (or getting married) is costly but can indicate strong love. The striking property we obtain is that a marriage bonus may actually reduce the probability that a couple gets married. If the bonus is sufficiently large, the signaling mechanism breaks down, and only a pooling equilibrium in which fewer couples get married remains. Similarly, a marriage penalty may increase the marriage probability. Specifically, the penalty may lead to a separating equilibrium with efficiency enhancing information transmission, which was otherwise not possible. Our results also imply that marriage decisions in the laissez-faire are not necessarily privately optimal. In some cases a bonus or a penalty may effectively make the marriage decision more efficient; it may increase the number of efficient marriages that otherwise may not be concluded.

Keywords: marriage penalty, marriage bonus, proposal game, signaling

JEL Classification: J120, D820, H310

Suggested Citation

Barigozzi, Francesca and Cremer, Helmuth and Roeder, Kerstin, Until Taxes Do Us Part: Tax Penalties or Bonuses and the Marriage Decision (November 21, 2017). CESifo Working Paper Series No. 6740, Available at SSRN: https://ssrn.com/abstract=3100033 or http://dx.doi.org/10.2139/ssrn.3100033

Francesca Barigozzi

Università di Bologna ( email )

Via Zamboni, 33
Bologna, 40126
Italy

Helmuth Cremer

University of Toulouse (GREMAQ & IDEI) ( email )

Toulouse, 31000
France
+33 1 6112 8606 (Phone)
+33 1 6112 8637 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Kerstin Roeder (Contact Author)

University of Augsburg ( email )

Universitätsstr. 2
Augsburg, 86159
Germany

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