Working Paper: NBER ID: w4820
Authors: John Piggott; John Whalley
Abstract: The conventional wisdom is that taxing individuals rather than households is superior from an efficiency point of view under progressive income taxation. This is because it leads to secondary workers, whose labour supply elasticity is high, being taxed at a lower marginal rate than primary workers, whose labour supply elasticity is low. But once household production is taken into account, things are more complicated since tax design should also not distort the input use of family members' time in household production. We use a simple general equilibrium model of household production parameterized using Australian data whose results clearly show that welfare effects can be either positive or negative when changing an existing income tax from an individual to a household basis. In so doing, we are able to investigate the comparative static effects of changing the tax unit from an individual to the household basis in a richer model than that used thus far in the literature, since we capture both Ramsey considerations from differential labour supply elasticities, and factor input distortions into household production. Our results challenge conventional wisdom, and suggest that household unit taxation deserves more sympathetic consideration than is currently the case.
Keywords: Taxation; Household Production; Public Economics
JEL Codes: H24; H31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| changing the tax unit from individuals to households (H31) | aggregate welfare gains or losses (E10) |
| household-based taxation (H31) | positive and negative welfare effects (D60) |
| household production (D13) | distortion of labor input decisions (H31) |
| distortion of labor input decisions (H31) | outweigh benefits of differentiated tax rates (H29) |
| switching to a household taxation model (H31) | preferred under certain conditions (C62) |