On the optimality of joint taxation for noncooperative couples

We present a noncooperative model of a family's time allocation between work and a home-produced public good, and examine whether the income tax should apply to couples or individuals. While tax-induced labor supply distortions lead to overprovision of the public good, spouses' failure to internalize the collective effect of their choices points towards underprovision. A large parameter range exists for which a move from individual to joint taxation improves the welfare of both spouses. The source of Pareto-improvement consists in moving the level of the public good closer to its first-best, while an adjustment of intra-family transfers compensates the secondary earner for the increased tax load.

► We present a noncooperative model of a couple's work and home production decisions.
► We examine whether the income tax should apply to couples or individuals.
► A move from individual to joint taxation may improve the welfare of both spouses.
► The improvement consists in moving home production closer to the first-best level.
► Intra-family transfers compensate the secondary earner for the higher tax load.