Optimal Taxation, Income Inequality and the Household

This paper analyses optimal piecewise linear tax systems for two-earner households, based on joint and individual incomes respectively. It models the interaction between wage rates and variation in child care prices and productivities as determinants of across-household heterogene- ity in second earner labour supply. We find that individual taxation is welfare-superior to joint taxation in models that match the data on empirical wage distributions, on grounds of both efficiency and equity. The main reason for this is the inequity created by income splitting in the presence of a high degree of inequality in the primary earner wage distribution.