Essays on Income Taxation

Abstract

This dissertation consists of two chapters. Both chapters study how alternate income taxation systems affect individual labor supply decisions. In the first chapter, I study how labor income taxation should vary with a household's income history in a life-cycle model with differentiated skill types and general equilibrium wages. To maintain the feasibility of the optimal taxation problem with a large state space, I use a novel neural network approach to simultaneously solve the model and compute the labor income tax function that maximizes steady state welfare. For most households, average tax rates increase over the life-cycle. However, for households with very high income histories, average tax rates decrease over the life-cycle. The welfare gains from history-dependent taxation are large, equivalent to about a two percent increase in lifetime consumption compared to a tax on current income. Finally, I show that a parametric function that varies with just the average of previous income levels mimics the full history-dependent tax system by increasing taxes more slowly over the life cycle with higher levels of average past income. In the second chapter, Amy Handlan and I investigate the labor disincentive effects of joint taxation on the labor supply of married couples. We use the federal recognition of same sex marriage as a natural experiment to study the effects of switching from individually filing taxes to being able to file jointly. We find that the ability to file taxes jointly had small effects on hours worked and employment by both primary and secondary earners. We then estimate a standard model of household labor supply using data on the labor supply of same sex couples. This model predicts a labor supply response for secondary earners that is three times larger than what is observed in the data. To investigate further, we modify the standard model to include private consumption and home production. Our model is able to match the small response in labor supply from changing tax regimes while also being consistent with existing estimates of labor supply elasticity. Finally, we re-estimate the model for heterosexual married couples and study a counterfactual switch from joint to individual taxation. While the standard model predicts a 3 percent increase in female labor supply, our model with private consumption and home production predicts an increase of only 0.1 percent.