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Capital Taxes, Labor Taxes and the Household

Author

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  • Rigas Oikonomou

    (HEC Montreal and Institut d'Analisi Economica)

  • Christian Siegel

    (Department of Economics, University of Exeter)

Abstract

We study the impact of capital and labor taxation in an economy where couples bargain over the intrahousehold allocation. We present a life cycle model with heterogeneous individuals and incomplete nancial markets. Drawing from the literature of the collective framework of household behavior, we model decision making within the couple as a contract under limited commitment. In this framework more wealth improves commitment and gives rise to insurance gains within the household. Our theory motivates these gains by the empirical observation that wealth, in contrast to labor income, is a commonly held resource within households. Based on this observation we study whether eliminating capital taxes from the economy, and raising labor taxes to balance the government's budget, may generate welfare gains to married households. We illustrate that the quantitative e ects from this reform are rather small. We attribute the small effects to the life cycle pattern of wealth accumulation and to the impact of labor income taxes on household risk sharing: In particular, we show that higher labor taxes may deteriorate the limited commitment problem, even though they may make the distribution of labor income more equitable within the household.

Suggested Citation

  • Rigas Oikonomou & Christian Siegel, 2014. "Capital Taxes, Labor Taxes and the Household," Discussion Papers 1413, University of Exeter, Department of Economics.
  • Handle: RePEc:exe:wpaper:1413
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    References listed on IDEAS

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    Cited by:

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    2. Fabio Blasutto & Egor Kozlov, 2020. "(Changing) Marriage and Cohabitation Patterns in the US: do Divorce Laws Matter?," 2020 Papers pbl245, Job Market Papers.

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    More about this item

    Keywords

    Life cycle models; incomplete financial markets; tax reform; intrahousehold allocations.;
    All these keywords.

    JEL classification:

    • D13 - Microeconomics - - Household Behavior - - - Household Production and Intrahouse Allocation
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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