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Optimal Taxation with Household Production

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  • Kleven, Henrik Jacobsen
  • Richter, Wolfram F
  • Sorensen, Peter Birch

Abstract

This paper suggests that the optimal tax system should favour market-produced services which are close substitutes for home-produced services. First, we modify the classical Corlett-Hague rule for optimal commodity taxation by showing that it may be optimal to impose a relatively low tax rate on consumer services even if such services are complements to leisure. Second, we find that when services and other goods are equally substitutable for leisure, so that uniform commodity taxation would be optimal in the absence of home production, the optimal tax structure will certainly involve a relatively low tax rate on consumer services. Copyright 2000 by Oxford University Press.

Suggested Citation

  • 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.
  • Handle: RePEc:oup:oxecpp:v:52:y:2000:i:3:p:584-94
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    1. Sandmo, Agnar, 1974. "A Note on the Structure of Optimal Taxation," American Economic Review, American Economic Association, vol. 64(4), pages 701-706, September.
    2. Sandmo, Agnar, 1990. "Tax Distortions and Household Production," Oxford Economic Papers, Oxford University Press, vol. 42(1), pages 78-90, January.
    3. W. J. Corlett & D. C. Hague, 1953. "Complementarity and the Excess Burden of Taxation," Review of Economic Studies, Oxford University Press, vol. 21(1), pages 21-30.
    4. Sadka, Efraim, 1977. "A theorem on uniform taxation," Journal of Public Economics, Elsevier, vol. 7(3), pages 387-391, June.
    5. 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.
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