The excessive taxation of married couples in Italy

In these times of fiscal austerity, governments are scrambling to find tax revenues and in particular to close loopholes and to chase tax evaders. While the goal is to raise more revenue (and be somewhat fairer, as tax evaders tend to have higher incomes), that can have the adverse effect of actually reducing tax revenue. While it is clear that the Laffer Curve is correct, there is little evidence that in aggregate any western economy is on the right side of its peak. But there there are some individual circumstances where it is.

Fabrizio Colonna and Stefania Marcassa discuss the taxation of married couples in Italy. Taxation in Italy is based on the individual, with deductions for children and the non-working spouse. As the incidence of these tax credits on the marginal tax credit decreases with the income of the first earner in a couple, typically the husband, there is a strong incentive for wifes of lower income husbands to work, full-time or part-time. This reduces the labor supply of the poor, increases poverty and increases the strain on welfare programs.

The paper estimates a complex labor choice model and runs two scenarios: the current one, and one where households can choose to file taxes individually or jointly. The latter boost women's labor force participation rate by 3 percentage points and reduces the proportion of women under some poverty threshold by half that. Others scenarios, such as gender-based taxation, are explored as well. In all scenarios, the assumption is that taxes are revenue-neutral. As poverty is reduced, the need for redistribution is reduced, something that makes the scenarios even more attractive.