Optimal Taxation and Tax Reform for Two-Earner Households

This article is concerned with the question of how two-earner households should be taxed. One reason for the importance of this issue is simply the quantitative significance of households formed around couples. A second reason is that the economic theory of optimal taxation and tax reform, at least as it is presented in the mainstream literature, provides little guidance on this issue, resting as it does on models of the single person household. An old insight in the earlier public finance literature is that any discussion of the taxation of two-person households necessarily involves the recognition of the importance of household production. In this article, we analyse optimal linear taxation and tax reform to put the 'conventional wisdom', which says that it is optimal to tax women on a separate, lower tax schedule than men, on a firmer basis. We also discuss some recent literature on the non-linear taxation of two-earner households. What emerges clearly from the analysis is how centrally important the relationship between productivity in household production and female labour supply really is, and how little we know about it empirically. (JEL codes: H21, H31, H33) Copyright The Author 2011. Published by Oxford University Press on behalf of Ifo Institute for Economic Research, Munich. All rights reserved. For permissions, please email: journals.permissions@oup.com, Oxford University Press.