The Tax Unit and Household Production

JOURNAL OF POLITICAL ECONOMY, Vol. 104, No. 2, April 1996

Posted: 21 May 1998

See all articles by John Piggott

John Piggott

University of New South Wales (UNSW) - Australian School of Business, School of Economics

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Abstract

Under a progressive income tax, conventional wisdom is that taxing individuals rather than households is preferred from an efficiency point of view. The reason is that secondary workers, whose labor supply elasticity is high, will be taxed at a lower marginal rate than primary workers, whose labor supply elasticity is low. Here, we argue that once household production is taken into account, things are more complicated since tax design should also not distort the input of family members' time in household production. Factor input distortions as well as Ramsey considerations thus need to enter the choice of the tax unit. We provide a numerical example of an economy for which a move from an individual to a household basis in the income tax can be efficiency improving. We then use a general equilibrium model, parameterized using Australian tax rates and data, whose results clearly show that welfare gains can occur under changes from an individual to a household basis for an existing income tax. Our results thus challenge conventional wisdom and suggest that household unit taxation deserves more sympathetic consideration than is currently the case.

JEL Classification: H21, H22, H23, H31, J22, J38

Suggested Citation

Piggott, John, The Tax Unit and Household Production. JOURNAL OF POLITICAL ECONOMY, Vol. 104, No. 2, April 1996. Available at SSRN: https://ssrn.com/abstract=4010

John Piggott

University of New South Wales (UNSW) - Australian School of Business, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

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