Tax Planning of Married Couples and Intra-Household Income Inequality

This paper examines tax planning of married couples under separate taxation. A theoretical analysis uses a family decision-model with a household public good to show that the secondary earner might veto against tax planning if the realization of tax savings increases intra-household income inequality. The empirical analysis exploits a specific feature of the German tax system, which allows married couples to save taxes by deviating from the default symmetric payroll-tax treatment and assigning a favorable tax treatment to the primary earner and an unfavorable tax treatment to the secondary earner. Based on a representative random sample of individual tax files, the empirical results confirm the role of the income distribution. Opting for a tax-minimizing treatment is found to be less likely if this is associated with larger losses in the net income of the secondary earner. While this holds irrespective of which of the spouses has higher earnings, couples where the wife is the primary earner display a general reluctance to assign the favorable tax treatment to the wife.