Fligrenia’s tax system has several tax brackets, ranging from a 0% marginal rate to a 50% marginal rate. The marginal tax rate paid by married couples under the current system is based on the last dollar earned by either spouse. Fligrenia is changing its tax system, however. Under the new system, the higher earner in a household will continue to be taxed as before (based on the marginal rate associated with total household income). The marginal rate for the lower earner will now be based on that worker’s income only, however.
a. Which families do you expect to be most affected by this tax change, and why?
b. Describe a difference-in-difference analysis that could be used to estimate the effects of taxation on married female labor supply.