Dynamic Optimal Taxation of Households

The explicit consideration of households also seeks to make a contribution to the emerging literature on dynamic optimal taxation with private information. One of the basic tenets of this approach is that normative analyses of government policies should consider constraints deriving from intrinsic frictions, such as the inability to observe individual productivities, so that relevant trade-offs are not unknowingly left out. Yet, this literature has so far ignored the presence of households, perhaps the most fundamental and pervasive institution in the economic system. While some features of households are unique, the proposed analysis may provide useful insights on the significance of other long-run relations between individuals, such as the one between employer and employee, for the design of optimal tax policy.