Optimal Income Taxation of Couples∗

This paper analyzes optimal joint income taxation of two-earner couples. Each couple is modelled as a single rational economic agent supplying labor along two dimensions: primary and secondary earnings. In contrast to the previous literature, we consider fully general joint income tax systems. The optimum tax system is separable into two individual and independent tax schedules only if skills, labor supply, and social marginal welfare weights are also separable between the two members of each couple. Strikingly, for a wide class of social welfare objectives, the tax distortion on the secondary earner vanishes asymptotically when the earnings of the primary earner become large. Numerical simulations (in progress) show that the tax rate on the secondary earner is actually decreasing with the earnings of the primary earner. As a result, the marginal tax rate on the primary earner is actually lower when the secondary earner works. Such a schedule is optimal because it allows the government to redistribute more from two earner toward one earner couples when the primary earner income is lower. ∗Henrik Kleven, University of Copenhagen. Claus Thustrup Kreiner University of Copenhagen. Emmanuel Saez, University of California, Department of Economics, 549 Evans Hall #3880, Berkeley, CA 94720, [email protected]. We thank for very helpful comments and discussions. Financial support from NSF Grant SES-0134946 is gratefully acknowledged.