Individual Income, Household Income, or Both? On the Taxation of Couples

OECD countries differ in how they treat taxation of the household. Some use individual income, others household income, and some use a combination of the two. In this paper I investigate whether a tax system based on both types of incomes, can be replaced by a tax system on individual income only. In a labor supply model with a continuum of individual skill levels, I use the perturbation approach to derive optimal taxes for an individualized tax system and for a tax system on joint income. The optimal individualized tax system is then perturbated in the direction of joint income to evaluate the desirability of a combined tax system. I find that desirability depends on how the government values the two different groups, for which the joint income tax differs from an individual tax, and on the distortions that both taxes create. At low income levels, redistribution is less important and desirability is determined by the difference in distortions.