The Effect of Divorce and Marriage Contracts on Tax Non-Compliance

This paper studies whether the landmark ruling Radmacher v Granatino 2010 changed tax non-compliance by married self-employed individuals in the UK through an increase in the enforceability of marriage contracts. I argue that the probability of divorce and the probability of marriage contracts being enforceable influence married self-employed individuals tax non-compliance behaviour as they try to hide income from their spouses. Using a theoretical model, I show that a higher probability of marriage contract enforceability leads to less income being hidden, while a higher probability of divorce results in more concealment. Additionally, the model predicts that higher tax rates increase the incentive to underreport income. A difference-in-differences analysis comparing married self-employed and married employed households in the UK suggests that the Radmacher v Granatino ruling however did not seem to significantly reduce income misreporting among married self-employed households.