Household Taxation, Consumption Insurance, and Welfare
We reexamine joint taxation of couples in the presence of wage risk and incomplete insurance markets. By linking spouses’ marginal tax rates, joint taxation changes how households use labor supply to self-insure consumption against wage shocks. This creates an insurance advantage of joint taxation worth 1.61 percent of con sumption in a calibrated life-cycle model. It largely offsets the disadvantages of joint taxation, though not completely in the current economic and policy environment. Joint taxation can become welfare-preferred at higher tax progressivity and, when progressivity is optimized separately under each system, joint and separate taxation deliver essentially identical welfare.