Taxation of Couples: Payroll Taxes and Transferable Benefits

• In Event: Taxation of Households

Abstract

This paper examines the optimal design of payroll taxes and social insurance in settings where benefits are partially transferable across spouses. In modern dual-earner households, one spouse can receive coverage through the other’s formal employment, creating incentives for partial informality—where one partner remains informal while the other contributes to the system. I develop a model in which couples jointly choose their formality status, and the government selects both a payroll tax rate and a benefit transferability parameter to maximize welfare. The optimal policy depends on three key elasticities: the responsiveness of male and female informality to the net-of-tax rate, and a cross-spousal elasticity capturing behavioral spillovers. To estimate these, I exploit Chile’s Bono al Trabajo de la Mujer (BTM), a large-scale subsidy that lowered the effective payroll tax for low-income women. Using nationally representative household surveys, I find that women eligible for the subsidy significantly reduced informality—especially those married to informal men—while their spouses became more likely to work informally. These findings confirm the presence of intra-household coordination and suggest that both payroll tax rates and benefit transferability should be set below current levels. Ignoring household interactions may lead to inefficient tax and subsidy designs.

Author

• Ana Paula Franco, University of Michigan