An evaluation of income splitting with variable female labour supply

Debate on the tax unit in Australia often involves claims that a system which allows spouses to split their incomes for the purposes of taxation is superior to an individual based system. In this paper we estimate a female labour supply model on data for married couples and use it to simulate the effects of a switch from the 1985/ 86 progressive individual personal income tax system to one allowing full income splitting. We analyze distributional outcomes and, at least as far as female labour supply is concerned, change in the excess burden of the tax system. The impacts depend upon the way in which the policy is made revenue neutral. We consider two tax replacement scenarios. We quantify the impact on female hours of work and investigate how welfare impacts vary by household characteristics.