The debate on the choice of the taxable unit is central for the analysis of tax-distortions and horizontal equity in the design of optimal taxation.
Since 1976, Italy has adopted a system that identifies individual income as basis for taxation, while including a deduction for the household’ makeup. The alternative taxation system is family-based, in the form of either the taxation of combined income or the taxation for parts. The latter can be performed by using the splitting method or the family quotient approach (with an equivalence scale).
The underlying idea of a family-based mechanism is the dependence of individual welfare, and ability to pay, on the composition and overall resources of the individual’s household. The splitting and, even more, the family quotient account for the effects of the economy of scale created by a higher family’ size. An individual-based taxation system, instead, hinges on the attribution, to the individual, of a full sovereignty over personal income.
In a progressive tax system, the choice of the taxable unit affects the impact of taxation. The system of taxation for parts hides a component of regressivity since it creates a tax advantage increasing with income. Moreover, a family-based taxation negatively influences the working decisions of the second spouse, often resulting in a disincentive for female labour supply, empirically proved to be more sensitive to the marginal tax rate. In addition to this, while a taxation on combined income discourages marriage, the system of taxation for parts has an opposite effect. On the other hand, the choice of an individual basis for taxation, which minimizes these distortions, may allow unequal treatments of families with the same income, burdening on the single-earner families. Besides, the choice of the individual as taxable unit leaves room for tax elusion, offering the incentive to impute movable and fixed property to the lower income spouse.
B. Salanié (2002) has analyzed the impact of this choice on horizontal equity, according to whom the effects of taxation on individuals should be invariant with respect to irrelevant individual differences. In his comparison of the tax treatments on a bachelor and a couple, he concluded that preserving horizontal equity implies the use of joint taxation with a coefficient read from the equivalence scale (but this result suffers from some limitations, such as the assumptions of labor supplies inelasticity and the dependence on the equivalence scale used).
The recent tendency to adopt an individual-based taxation should be evaluated in the light of the increasing number of single-parent families and of the growing women participation in labor market.
Silvia Sarpietro – 676