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Household Production and the Design of the Tax Structure

Listed author(s):
  • Dan Anderberg
  • Alessandro Balestrino

This paper amalgamates two topical issues in the economics ofcommodity taxation: the general case for non-uniformity, andthe tax treatment of commodities that are either inputs to householdproduction or close substitutes for household produced goods.Assuming a redistributive objective and that the government canimplement a non-linear income tax system and linear commoditytaxes we investigate if the existence of household productiongenerates a natural case for non-uniform commodity taxation.Four main results are reported. First, when the set of commoditiesis partitioned into consumption goods and input goods, and commoditytaxes are restricted to being within-group uniform, the compositecommodity theorem can be used to characterize the optimal commoditytaxes. Secondly, sufficient conditions for within-group uniformcommodity taxes to be fully optimal are derived. Thirdly, weargue that an input good should be taxed at a higher rate thangeneral consumption if and only if the degree of complementarityin household production (between the input good and a time-input)is larger than the degree of complementarity in consumption (betweengeneral consumption and the household produced good). Finally,we show that under simple normality, a market substitute forthe household-produced good should be taxed at a lower rate thangeneral consumption. The intuition for the last two results isthat the suggested pattern of taxation discourages ``do-it-yourself''behaviour, which relaxes the self-selection problem. Copyright Kluwer Academic Publishers 2000

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File URL: http://hdl.handle.net/10.1023/A:1008749809286
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Article provided by Springer & International Institute of Public Finance in its journal International Tax and Public Finance.

Volume (Year): 7 (2000)
Issue (Month): 4 (August)
Pages: 563-584

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Handle: RePEc:kap:itaxpf:v:7:y:2000:i:4:p:563-584
DOI: 10.1023/A:1008749809286
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  1. Ray, R., 1996. "Issues in the Design and Reform of Commodity Taxes: Analytical Results and Empirical Evidence," Papers 1996-02, Tasmania - Department of Economics.
  2. Joseph E. Stiglitz, 1981. "Self-Selection and Pareto Efficient Taxation," NBER Working Papers 0632, National Bureau of Economic Research, Inc.
  3. Juster, F Thomas & Stafford, Frank P, 1991. "The Allocation of Time: Empirical Findings, Behavioral Models, and Problems of Measurement," Journal of Economic Literature, American Economic Association, vol. 29(2), pages 471-522, June.
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  5. Cremer, Helmuth & Gahvari, Firouz, 1999. " Uncertainty, Commitment, and Optimal Taxation," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 1(1), pages 51-70.
  6. Aled ab Iorwerth & John Whalley, 2002. "Efficiency considerations and the exemption of food from sales and value added taxes," Canadian Journal of Economics, Canadian Economics Association, vol. 35(1), pages 166-182, February.
  7. CREMER, Helmuth & PESTIEAU , Pierre & ROCHET, Jean-Charles, "undated". "Direct versus indirect taxation: the design of the tax structure revisited," CORE Discussion Papers RP 1528, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Chris Heady, 1993. "Optimal taxation as a guide to tax policy: a survey," Fiscal Studies, Institute for Fiscal Studies, vol. 14(1), pages 15-41, February.
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  10. Kleven, Henrik Jacobsen & Richter, Wolfram F & Sorensen, Peter Birch, 2000. "Optimal Taxation with Household Production," Oxford Economic Papers, Oxford University Press, vol. 52(3), pages 584-594, July.
  11. Angus S. Deaton, 1979. "Optimal Taxes and the Structure of Preferences," Working Papers 506, Princeton University, Department of Economics, Industrial Relations Section..
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  13. John Piggott & John Whalley, 2001. "VAT Base Broadening, Self Supply, and the Informal Sector," American Economic Review, American Economic Association, vol. 91(4), pages 1084-1094, September.
  14. Kolm, Ann-Sofie, 1998. "Labour Taxation in a Unionised Economy with Home Production," Working Paper Series 1998:7, Uppsala University, Department of Economics.
  15. Atkinson, A. B. & Stiglitz, J. E., 1972. "The structure of indirect taxation and economic efficiency," Journal of Public Economics, Elsevier, vol. 1(1), pages 97-119, April.
  16. Sherwin Rosen, 1997. "Public Employment, Taxes, and the Welfare State in Sweden," NBER Chapters, in: The Welfare State in Transition: Reforming the Swedish Model, pages 79-108 National Bureau of Economic Research, Inc.
  17. Lindbeck, Assar & Nandakumar, Parameswar, 1990. "Public Spending and Private Services: Macroeconomic Aspects," Oxford Economic Papers, Oxford University Press, vol. 42(3), pages 620-634, July.
  18. Nava, Mario & Schroyen, Fred & Marchand, Maurice, 1996. "Optimal fiscal and public expenditure policy in a two-class economy," Journal of Public Economics, Elsevier, vol. 61(1), pages 119-137, July.
  19. Cremer, Helmuth & Gahvari, Firouz, 1995. "Uncertainty and optimal taxation: In defense of commodity taxes," Journal of Public Economics, Elsevier, vol. 56(2), pages 291-310, February.
  20. Niels Fredriksen & Peter Hansen & Henrik Jacobsen & Peter Sørensen, 1995. "Subsidising consumer services: effects on employment, welfare and the informal economy," Fiscal Studies, Institute for Fiscal Studies, vol. 16(2), pages 71-93, May.
  21. Naito, Hisahiro, 1999. "Re-examination of uniform commodity taxes under a non-linear income tax system and its implication for production efficiency," Journal of Public Economics, Elsevier, vol. 71(2), pages 165-188, February.
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