Income taxation and marital decisions

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12 Scopus citations

Abstract

Differential tax treatment of married and single people is a key feature of the tax code in the US and other countries. We analyze its equilibrium and welfare effects in a matching model with search frictions and nontransferable utility. We find that an increase in taxes on married people unambiguously reduces the equilibrium number of marriages, but it need not make both men and women more reluctant to marry. We also show that it is optimal to give married couples a preferential tax treatment. A quantitative analysis using US data reveals that relatively large changes in taxes are associated with small changes in the number of marriages and divorces. Finally, we extend the model to allow for cohabitation as an alternative to marriage, and find that the number of marriages becomes more sensitive to increases in the marriage tax penalty. The magnitude of the resulting changes, however, is still moderate.

Original languageEnglish (US)
Pages (from-to)565-599
Number of pages35
JournalReview of Economic Dynamics
Volume8
Issue number3
DOIs
StatePublished - Jul 2005

Keywords

  • Cohabitation
  • Marriage
  • Marriage penalty
  • Marriage tax
  • Two-sided search

ASJC Scopus subject areas

  • Economics and Econometrics

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