Taxation, Aggregates and Two-Person Households

This paper studies studies the effects of alternative taxation rules when salient demographic features of modern economies are explicitly considered. We build a equilibrium framework in which the formation and dissolution of households, household labor supply decisions at the intensive and extensive margin, and progressive taxation of household incomes are explicitly taken into account. We then use this framework to quantify the effects of several reforms to the U.S. tax system. Individuals differ in terms of their skills, gender and marital status, and make decisions regarding asset accumulation, hours of work, and on the labor force participation of household members within a married household. We parameterize the model so it is consistent with cross-sectional observations on gender and skill premia across schooling groups, labor force participation and the observed degree of marital sorting under a structure of income taxation that resembles the one currently prevailing in the United States. We represent such structure via effective tax functions that we estimate from recent tax return data. Our preliminary findings indicate (i) consumption tax reforms have sizeable effects on output, labor force participation and the size of the aggregate labor input; (ii) the output effects of tax reforms depends importantly on the calibrated level of labor force participation of second earners; (iii) the degree of marital sorting plays a crucial role in generating the observed effects on output, capital and hours worked.