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The Tax Unit and Household Production

  • John Piggott
  • John Whalley

The conventional wisdom is that taxing individuals rather than households is superior from an efficiency point of view under progressive income taxation. This is because it leads to secondary workers, whose labour supply elasticity is high, being taxed at a lower marginal rate than primary workers, whose labour supply elasticity is low. But once household production is taken into account, things are more complicated since tax design should also not distort the input use of family members' time in household production. We use a simple general equilibrium model of household production parameterized using Australian data whose results clearly show that welfare effects can be either positive or negative when changing an existing income tax from an individual to a household basis. In so doing, we are able to investigate the comparative static effects of changing the tax unit from an individual to the household basis in a richer model than that used thus far in the literature, since we capture both Ramsey considerations from differential labour supply elasticities, and factor input distortions into household production. Our results challenge conventional wisdom, and suggest that household unit taxation deserves more sympathetic consideration than is currently the case.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4820.

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Date of creation: Aug 1994
Date of revision:
Publication status: published as Journal of Political Economy, Vol. 104, no. 2 (April 1996): 398-418.
Handle: RePEc:nbr:nberwo:4820
Note: PE
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  1. Feenberg, Daniel R. & Rosen, Harvey S., 1995. "Recent Developments in the Marriage Tax," National Tax Journal, National Tax Association, vol. 48(1), pages 91-101, March.
  2. Boskin, Michael J. & Sheshinski, Eytan, 1983. "Optimal tax treatment of the family: Married couples," Journal of Public Economics, Elsevier, vol. 20(3), pages 281-297, April.
  3. 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.
  4. Wales, T J & Woodland, A D, 1976. "Estimation of Household Utility Functions and Labor Supply Response," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 17(2), pages 397-410, June.
  5. Harvey S. Rosen, 1978. "The Measurement of Excess Burden with Explicit Utility Functions," NBER Chapters, in: Research in Taxation, pages 121-135 National Bureau of Economic Research, Inc.
  6. Juster, F. Thomas & Stafford, Frank P., 1990. "The Allocation of Time: Empirical Findings, Behavioural Models, and Problems of Measurement," Working Paper Series 258, Research Institute of Industrial Economics.
  7. Wales, Terence J & Woodland, A D, 1977. "Estimation of the Allocation of Time for Work, Leisure, and Housework," Econometrica, Econometric Society, vol. 45(1), pages 115-32, January.
  8. Kakwani, Nanok C, 1977. "Measurement of Tax Progressivity: An International Comparison," Economic Journal, Royal Economic Society, vol. 87(345), pages 71-80, March.
  9. Haurin, Donald R & Hendershott, Patric H & Kim, Dongwook, 1993. "The Impact of Real Rents and Wages on Household Formation," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 284-93, May.
  10. Kay, J. A., 1980. "The deadweight loss from a tax system," Journal of Public Economics, Elsevier, vol. 13(1), pages 111-119, February.
  11. Killingsworth, Mark R. & Heckman, James J., 1987. "Female labor supply: A survey," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 2, pages 103-204 Elsevier.
  12. Boskin, Michael J., 1975. "Efficiency aspects of the differential tax treatment of market and household economic activity," Journal of Public Economics, Elsevier, vol. 4(1), pages 1-25, February.
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