Taxation and the Earnings of Husbands and Wives: Evidence From Sweden

I examine the response of husbands' and wives' earnings to a tax reform in which husbands' and wives' tax rates changed independently, allowing me to examine the effect of both spouses' incentives on each spouse's behavior. I analyze the large Swedish tax reform of 1990–1991 and find that in response to a compensated fall in one spouse's tax rate, each spouse's earnings rise. I compare these results to those of simplified econometric models used in the typical setting in which independent variation in each spouse's tax rate is unavailable. I find that standard econometric specifications may produce substantially biased estimates.