Tax filing choices for the household

Abstract

Giving couples the option to either file individually or jointly is equivalent to offering the envelope budget set if household choices may be rationalized by a utility maximization problem. This need not be the case if instead a collective model best describes household behavior. We study tax filing choices under the assumption that households’ decisions are outcomes of Nash bargains. Threat points for the bargain are minimum utilities that spouses perceived as being available in case of disagreement, modeled as the utilities attained by each spouse as a follower in counter-factual Stackelberg games. If individual filing is an option the utility thus attained establishes a lower bound for the threat points. We assess the allocative impact of allowing couples to file individually. Our numeric exercises show that redistribution across spouses due to this effect may be substantial even when this option is never chosen. This places filing options as a non-trivial aspect of tax policies for the household.