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Non-minimization of source taxes on labor income

Empirical evidence from Germany
: Stöwhase, S.


Review of Economics of the Household 9 (2011), Nr.2, S.293-306
ISSN: 1569-5239
ISSN: 1573-7152
Fraunhofer FIT ()
withholding taxes; empirics; microsimulation; Germany

The present paper analyzes the choice of tax classes by married couples under the German withholding tax on wage income. Making use of micro data from official tax returns for the year 1998 and conducting simulation analysis, it is shown that more than 20 percent of the observed households do not choose the tax class combination that minimizes withholding. In the second part of the paper, several explanations for this result are discussed. Among those explanations, transaction costs and Pareto-inefficient intrahousehold-decision-making are the most likely.