How do different income taxation systems — for instance individual vs. joint — affect people’s decisions and welfare? Answering this question is important because governments can choose among several systems that differ most prominently for the treatment of individuals in married households. They can adopt an individual tax system, following the example of Canada and Sweden, which consider neither spousal earnings nor marital status when determining an individual’s tax schedule. Alternatively, they can employ a joint tax system, like the ones in the U.S. and Germany, which consider only pooled earnings of the couple when determining married individuals’ tax rates and tax liability. Or, they can adopt a hybrid system of the type used by France and the U.K. that borrow elements from both joint and individual schemes. This choice has the potential to produce sizeable short- and long-run effects on individual decisions, economic outcomes, and welfare, as it affects primary and secondary earners’ tax schedules, their contribution to after-tax household income, and correspondingly their incentives to work and save.
In a study titled “Taxation and Household Decisions: An Intertemporal Analysis”, Professor Maurizio Mazzocco and coauthor Mary Ann Bronson (Georgetown University) study this choice between tax systems by estimating how they affect economic decisions, with emphasis on the long-run consequences. The project is divided into two parts.
The first part of the study uses a variety of data sources to document that the choice of a tax scheme has the potential to produce large effects on the decisions to work of primary and secondary earners. The main finding is that the joint taxation system adopted by the U.S. creates incentives for married couples to have the primary earner specialize in labor market activities and the secondary earner in household activities, relative to the individual system. A switch to individual taxation has therefore the potential to significantly increase the labor force participation rate of U.S. women. This first part uses only data to document the effect of changes in tax systems. Thus, as tax reforms affect entire populations, it can only provide suggestive evidence on their effects.
In the second part of the project, Mazzocco and Bronson quantify the short- and long-term effects of tax reforms by developing and estimating a dynamic model of household decisions. They use the model to evaluate three popular tax policies: a shift from a joint to an individual taxation system; the introduction of a secondary earner deduction in a joint taxation system; and the addition of child care subsidies to a joint and to an individual taxation system. The results indicate that the transition from a joint to an individual taxation system has significant long-term effects on choices and welfare, with married households in which only one spouse works being the most affected. The study finds that the labor force participation of secondary earners increases by as much as 5 percentage points. The move to individual taxation changes also how secondary earners allocate time between market and household activities. The authors find that they reduce the time devoted to household activities and increase the hours spent in the labor market, with the increase in labor hours that is smaller than the decline in household time. The corresponding increase in leisure for secondary earners is explained by a shift in intra-household decision power toward women of three percentage points generated by the tax reform. The secondary earner deduction policy generates similar results. The child-subsidy policy also increases the fraction of secondary earners who work and their labor supply at the expenses of time devoted to household activities under both the joint and individual taxation system. But the impact is significantly larger under the individual system. Consequently, if the goal of the child-subsidy policy is to increase female labor force participation, it is more effective and less costly under an individual scheme.
In the current economic environment, there is a general belief that women should be empowered through an increase in their labor force participation. The project’s results indicate that tax reforms are an effective way of achieving this goal.