Taxation of Consumption and Labor Income: A Quantitative Approach

Francesca Parodi

American Economic Journal: Macroeconomics, 2023, vol. 15, issue 4, 177-216

Abstract: I quantitatively characterize optimal consumption and labor income taxes in a structural life-cycle model of household consumption, saving, and employment choices that allows for irreversibility of durable goods and preference heterogeneity. I find that durables should be subsidized and nondurables should be taxed at a uniform rate. The durable subsidy is driven by the life-cycle features of the model together with durables' irreversibility and borrowing constraints. Uniform taxation on nondurables holds under exogenous and endogenous—fully or weakly separable—labor supply and it relies on homogeneity of intertemporal preferences. Allowing for government's equity concerns, I show that the model rationalizes the tax practice.

JEL-codes: D15 G51 H21 H23 H24 H31 J22 (search for similar items in EconPapers)
Date: 2023
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Working Paper: Taxation of Consumption and Labor Income: a Quantitative Approach (2020)
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DOI: 10.1257/mac.20200289

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