Making the Switch From Joint to Individual Taxation in Luxembourg. Cost, Behavioural Response and Welfare Effects

Luxembourg Institute of Socio-Economic Research (LISER) Working Paper Series 2020-05

36 Pages Posted: 3 Jun 2020

See all articles by Nizamul Islam

Nizamul Islam

Luxembourg Institute of Socio-Economic Research (LISER)

Karina Doorley

ESRI

Lennart Flood

Goeteborg University - School of Business, Economics and Law; IZA Institute of Labor Economics

Date Written: May 4, 2020

Abstract

We study the effect of a move from joint to individual taxation system using 2,276 couple household living in Luxembourg. We estimate simultaneously labour supply and social assistance (RMG) participation, exploiting a discrete choice model. We focus on the distributional, work (extensive and intensive margin) incentive, and the social welfare effect of introducing a mandatory individual taxation system in Luxembourg. The work incentive of married women increases by 2.27% in intensive margin and 2.58% in extensive margin after the reform. The incentive of married men is almost zero. Equivalised disposable income, after the behavioural adjustment, decreases on average 2.1 per cent. After adjustments to direct and indirect taxes, the net revenue-neutral result is a budget surplus for the central government of around €10 million.

Keywords: Joint Taxation, Micro-simulation, Labour Supply, Welfare

JEL Classification: B21, B31, D31, H24, H31

Suggested Citation

Islam, Nizamul and Doorley, Karina and Flood, Lennart, Making the Switch From Joint to Individual Taxation in Luxembourg. Cost, Behavioural Response and Welfare Effects (May 4, 2020). Luxembourg Institute of Socio-Economic Research (LISER) Working Paper Series 2020-05, Available at SSRN: https://ssrn.com/abstract=3593263 or http://dx.doi.org/10.2139/ssrn.3593263

Nizamul Islam (Contact Author)

Luxembourg Institute of Socio-Economic Research (LISER) ( email )

11, Porte des Sciences
Campus Belval – Maison des Sciences Humaines
Esch-sur-Alzette, L-4366
Luxembourg

Karina Doorley

ESRI ( email )

Whitaker square Sir john Rogerson's Quay
Dublin 2
Dublin
Ireland

Lennart Flood

Goeteborg University - School of Business, Economics and Law ( email )

Box 640
SE 405 30 Goeteborg
Sweden
+46 31 773 1331 (Phone)
+46 31 773 1043 (Fax)

IZA Institute of Labor Economics

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

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