Taxing the Labor Income of Spouses

This study investigates the consequences of revenue-neutral tax reforms on the members of two-person households. The model employed has individual utility functions for household members and allows for household production. General conditions are derived specifying when such tax reforms are able to generate Pareto improvements for the individuals involved. Certain relevant characteristics of labor-supply elasticities drawn from the empirical literature are presented and are related to the theoretical results presented. This allows for some simple recommendations to be formulated concerning such topical social policy issues as income splitting and the tax treatment of families.