Testing the Income Pooling Hypothesis and its Link to the Taxation of Couple Households: Evidence from Demand System Estimation for Germany

The test is performed within the quadratic almost ideal demand system framework, which allows for an endogenous expenditure budget and endogenous individual income contribution shares in an instrumental variables approach. Although perfect income pooling is broadly rejected, there are significant differences regarding the marital status, the presence of at least one child in the household and whether the household is located in a former West or East German federal state. Married and unmarried couples with children are closer to the acceptance of the hypothesis than couples without children. The approach allows to calculate justifiable differentials of the marginal tax rates within the household if income pooling is rejected.