Making the switch. The employment and fiscal effects of introducing individual income taxation in Luxembourg.

Over the last few decades, the general trend in European Union countries has been a move from joint towards individual taxation. However, joint taxation, whereby the income of a couple in a household is fully split between them or aggregated in determining the income tax liability, is still present in the US as well as some EU countries, such as Luxembourg, France and Portugal, despite the fact that this system imposes much higher marginal tax rates for the secondary earner in the couple. As women are generally the secondary earners in a couple household and as they typically have more elastic labour supply, theory predicts that the optimal taxation model for labour supply should not impose higher marginal tax rates on women. Using microsimulation linked to a discrete choice labour supply model, we evaluate the proposed shift from joint to individual taxation in Luxembourg. We find that female labour supply can be expected to increase by 3% in the wake of such a shift, bringing Luxembourg somewhat closer to the Horizon 2020 headline target of a 75% employment rate.