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The Optimal Tax Rule in the Presence of Time Use

  • Jean Lim
  • Carolina Rodríguez-Zamora
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    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`.

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    File URL: http://www.banxico.org.mx/publicaciones-y-discursos/publicaciones/documentos-de-investigacion/banxico/%7B8F532460-0427-65C2-83BE-AA08A90A0520%7D.pdf
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    Paper provided by Banco de México in its series Working Papers with number 2010-05.

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    Date of creation: Jun 2010
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    Handle: RePEc:bdm:wpaper:2010-05
    Contact details of provider: Web page: http://www.banxico.org.mx
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    1. Daniel S. Hamermesh, 2007. "Time to Eat: Household Production under Increasing Income Inequality," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(4), pages 852-863.
    2. Antras, Pol, 2004. "Is the U.S. Aggregate Production Function Cobb-Douglas? New Estimates of the Elasticity of Substitution," Scholarly Articles 3196325, Harvard University Department of Economics.
    3. Kleven, Henrik Jacobsen, 2004. "Optimum taxation and the allocation of time," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 545-557, March.
    4. Sandmo, Agnar, 1987. "A Reinterpretation of Elasticity Formulae in Optimum Tax Theory," Economica, London School of Economics and Political Science, vol. 54(213), pages 89-96, February.
    5. Berndt, Ernst R, 1976. "Reconciling Alternative Estimates of the Elasticity of Substitution," The Review of Economics and Statistics, MIT Press, vol. 58(1), pages 59-68, February.
    6. Peter Rupert & Richard Rogerson & Randall Wright, 1994. "Estimating substitution elasticities in household production models," Staff Report 186, Federal Reserve Bank of Minneapolis.
    7. Boadway, Robin & Gahvari, Firouz, 2006. "Optimal taxation with consumption time as a leisure or labor substitute," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 1851-1878, November.
    8. Reuben Gronau & Daniel S. Hamermesh, 2003. "Time Vs. Goods: The Value of Measuring Household Production Technologies," NBER Working Papers 9650, National Bureau of Economic Research, Inc.
    9. Firouz Gahvari & C.C. Yang, 1993. "Optimal Commodity Taxation and Household Consumption Activities," Public Finance Review, , vol. 21(4), pages 479-487, October.
    10. Belan, Pascal & Gauthier, Stéphane & Laroque, Guy, 2008. "Optimal grouping of commodities for indirect taxation," Journal of Public Economics, Elsevier, vol. 92(7), pages 1738-1750, July.
    11. 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.
    12. Pascal Belan & Stéphane Gauthier & Guy Laroque, 2008. "Optimal grouping of commodities for indirect taxation," Post-Print hal-00731151, HAL.
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