The Impact of Income Splitting on Intrafamily Distribution in a Dynamic Family Bargaining Model

The income-splitting method of personal income taxation assesses a couple's tax liability by assigning half of the couple's taxable income to each spouse. There is currently a hot debate over whether such a method should be made available to taxpayers in Canada, which has always assessed an individual's tax liability on the basis of the person's individual income independent of marital status. This paper provides an analysis of how income splitting impacts intrafamily distribution in a dynamic bargaining model with a divorce threatpoint. If income splitting leads to more specialization by increasing the labour supply of the husband, decreasing the labour supply of the wife, and hence increasing the wife's time spent in household production, income splitting has an ambiguous effect on the wife's welfare and a positive impact on the husband's welfare. The reason for the ambiguous impact on the wife's welfare is that her bargaining power decreases simultaneously with an outward shift of the intertemporal utility possibility frontier. Changing divorce laws to protect the spouse specializing in household production in response to a change in family taxation may change the threatpoint of the family bargaining problem from divorce to a threatpoint within marriage.