The Taxation of Couples

The paper presented in this Mannheim Applied Seminar shows an analysis of the tax treatment of couples. Specifically, the authors analyze reforms that depart from the status quo tax treatment of couples in the direction of individual taxation. With such a reform, marginal tax rates are lowered for secondary earners or increased for primary earners. They derive sufficient statistics formulas that can be used to check whether such reforms would be Pareto-improving, welfare-improving or politically feasible. They apply these sufficient statistics to US tax policy since the 1960s using a microsimulation model. Their main result concerns revenue-neutral reform towards individual taxation. Such reforms create winners and losers. The winners tend to be couples with a relatively small gap between primary and secondary earnings. The losers tend to be couples with a relatively large gap. Political feasibility requires majority-support, i.e. that the winners outnumber the losers. Over the years, the number of winners from such a reform has grown and only recently passed the majority threshold. Thus, reforms towards individual taxation have not been politically feasible in the past, but have become politically feasible recently. Such reforms would, however, be rejected by a Rawlsian social welfare function.