Making the Switch From Joint to Individual Taxation in Luxembourg. Cost, Behavioural Response and Welfare Effects

We study the effect of a move from joint to individual taxation system using 2,276 couple household living in Luxembourg. We estimate simultaneously labour supply and social assistance (RMG) participation, exploiting a discrete choice model. We focus on the distributional, work (extensive and intensive margin) incentive, and the social welfare effect of introducing a mandatory individual taxation system in Luxembourg. The work incentive of married women increases by 2.27% in intensive margin and 2.58% in extensive margin after the reform. The incentive of married men is almost zero. Equivalised disposable income, after the behavioural adjustment, decreases on average 2.1 per cent. After adjustments to direct and indirect taxes, the net revenue-neutral result is a budget surplus for the central government of around €10 million.