Macroeconomics Seminar Series. Till the IRS Do Us Part: (Optimal) Taxation of Households (joint with Hans Holter and Dirk Krueger)
Published: 2 October 2025
9 October 2025. Professor Serhiy Stepanchuk, University of Southampton
Professor Serhiy Stepanchuk (University of Southampton)
Till the IRS Do Us Part: (Optimal) Taxation of Households (joint work with Hans Holter and Dirk Krueger)
Thursday, 9 October 2025, 15:00–16:30
Room 386AB, Adam Smith Business School
Abstract
This paper argues that a progressive tax system combined with individual taxation of married couples can generate more revenue than the current household-based U.S. system, especially when the extra revenues do not induce negative labor supply effects through increased government transfers. A progressive system that taxes individuals rather than couples jointly leads to larger labor force participation and higher average human capital, creates more “fiscal space”, Laffer curves shift up higher and social welfare potentially rises. In our model with one- and two-earner households, human capital and an extensive margin labor supply decision, the peak of the Laffer curve is 12 percentage points higher with an individual-based, progressive tax system than with the current U.S. tax system. The maximum revenue is attained with 60% more progressivity than the current system, and at an average tax rate of 41%. Progressive taxation, when imposed on individuals rather than households, lowers the average tax rate for individuals with low income that are close to the participation margin. At the same time it creates a positive income effect on the labor supply of these individuals by reducing the net income of their higher earning spouses and limiting their net earnings potential in the case of a high temporary labor productivity. Whereas steady state welfare under a joint tax system is maximized when the tax system features no progressivity at all, under individual-based taxation the optimal tax system features significant tax progressivity (albeit slightly less than the current U.S. status quo), and welfare gains relative to this status quo of 4.9% in consumption-equivalent variation. Cohorts born during the transition also experience significant welfare gains from this reform.
Biography
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First published: 2 October 2025