Does the Representation of Family Decision Process Matter? a Collective Model of Household Labour Supply for the Evaluation of a Personal Tax Reform in Spain

This paper presents an application of the collective model of labour supply, allowing for labour participation and non-linear budget sets. To identify the model, some preference parameters are estimated, while some other key parameters are calibrated so as to replicate as best as possible observed labour supplies under the 1994 personal tax system in Spain. The model is used to simulate the important reform of the tax system introduced in 1999. It is seen that the reform induces important behavioural changes through two channels: changes in the budget constraint, and changes in the bargaining power of the spouses within couples. The reform leads to a decrease in average tax rates, a larger redistributive effect on the before tax income distribution than the 1994 tax system, and an increase in social welfare defined on the after tax, or disposable income distribution. In addition, the reform induces an increase in the female’s power index, utility gains for all females, and utility losses for almost all males in the sample of couples.