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The Optimal Tax Rule in the Presence of Time Use

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  • Lim Jean
  • Rodríguez-Zamora Carolina

Abstract

Using Mexican data on household time use and consumption, we find significant substitution between goods and time in home production and different elasticities of substitution for different household commodities. Adding these findings to the Ramsey optimal tax problem, we show it is optimal to impose higher taxes on market goods used in the production of commodities with a lower elasticity of substitution between goods and time. The reason is that government wants to minimize the distortionary substitution from market purchases toward untaxed time use in home production. This is an analog of the classical Corlett and Hague (1953-1954) result, differing in that we allow for the possibility of substitution between goods and time in the production of commodities. Leaving aside distributional considerations, we conclude that higher taxes should be imposed on market goods used in the production of 'Eating' and lower taxes imposed on market goods used in the production of 'Recreation'.

Suggested Citation

  • Lim Jean & Rodríguez-Zamora Carolina, 2010. "The Optimal Tax Rule in the Presence of Time Use," Working Papers 2010-05, Banco de México.
    • Handle: RePEc:bdm:wpaper:2010-05
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    File URL: https://www.banxico.org.mx/publications-and-press/banco-de-mexico-working-papers/%7B67640365-3DD8-6929-07A2-79C84B7C922F%7D.pdf
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    References listed on IDEAS

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    5. Rupert, Peter & Rogerson, Richard & Wright, Randall, 1995. "Estimating Substitution Elasticities in Household Production Models," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 6(1), pages 179-193, June.
    6. Firouz Gahvari & C.C. Yang, 1993. "Optimal Commodity Taxation and Household Consumption Activities," Public Finance Review, , vol. 21(4), pages 479-487, October.
    7. Vern Caddy, 1976. "Empirical Estimation of the Elasticity of Substitution : A Review," Centre of Policy Studies/IMPACT Centre Working Papers op-09, Victoria University, Centre of Policy Studies/IMPACT Centre.
    8. Kleven, Henrik Jacobsen, 2004. "Optimum taxation and the allocation of time," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 545-557, March.
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    Cited by:

    1. Daniel S. Hamermesh, 2009. "Grazing, Goods and Girth: Determinants and Effects," NBER Working Papers 15277, National Bureau of Economic Research, Inc.

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    More about this item

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • D13 - Microeconomics - - Household Behavior - - - Household Production and Intrahouse Allocation

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