Household Production and the Design of the Tax Structure

Dan Anderberg and Alessandro Balestrino

International Tax and Public Finance, 2000, vol. 7, issue 4, 563-584

Abstract: This paper amalgamates two topical issues in the economics ofcommodity taxation: the general case for non-uniformity, andthe tax treatment of commodities that are either inputs to householdproduction or close substitutes for household produced goods.Assuming a redistributive objective and that the government canimplement a non-linear income tax system and linear commoditytaxes we investigate if the existence of household productiongenerates a natural case for non-uniform commodity taxation.Four main results are reported. First, when the set of commoditiesis partitioned into consumption goods and input goods, and commoditytaxes are restricted to being within-group uniform, the compositecommodity theorem can be used to characterize the optimal commoditytaxes. Secondly, sufficient conditions for within-group uniformcommodity taxes to be fully optimal are derived. Thirdly, weargue that an input good should be taxed at a higher rate thangeneral consumption if and only if the degree of complementarityin household production (between the input good and a time-input)is larger than the degree of complementarity in consumption (betweengeneral consumption and the household produced good). Finally,we show that under simple normality, a market substitute forthe household-produced good should be taxed at a lower rate thangeneral consumption. The intuition for the last two results isthat the suggested pattern of taxation discourages ``do-it-yourself''behaviour, which relaxes the self-selection problem. Copyright Kluwer Academic Publishers 2000

Keywords: indirect taxation; household production; self-selection (search for similar items in EconPapers)
Date: 2000
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Citations: View citations in EconPapers (14)

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DOI: 10.1023/A:1008749809286

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