Friday, February 15, 2008

A Women-only Tax Cut?

Alesina et al. defend their proposal to base taxes on gender. The basic idea, from their earlier article, is the following:

Women have a more elastic labour supply than men. By the Ramsey principle of optimal taxation, familiar to any first year graduate student of public finance, women’s labour income should be taxed less....In modern western societies (and elsewhere) differences in labour supply behaviour of men and women are not rooted only in the functioning of markets and firms but originate within the gender difference in access to labour market opportunities is the reason behind the difference in labour supply participation rates and elasticities of men and women.

I wonder: How would they treat same-sex couples?

It is hard for me to imagine this proposal making much headway as a practical matter. But I can imagine a more modest reform that would have similar effects: making the individual, rather than than the married couple, the taxpaying unit.

Under the current regime in the United States, a typical woman married to a high-income man pays a high marginal tax rate from the first dollar she earns. Indeed, because she faces the payroll tax plus the top marginal income tax rate, she faces a higher marginal tax rate than her husband. (Recall that there is a cap on the payroll tax.) The situation is symmetric, of course: a typical man married to a high-income woman faces the same high tax rates.

If, however, income taxes were paid by individuals rather than by families, the secondary earner would face lower marginal tax rates on his or her initial earnings. This change might well induce an increase in labor supply and enhance efficiency.