Optimal Taxation, Child Care and Models of the Household

Optimal Taxation, Child Care and Models of the Household This paper presents for the first time the properties of optimal piecewise linear tax systems for two-earner households, based on joint and individual incomes respectively. A key contribution is the analysis of the interaction of second earner wage differences, variation in prices of bought-in inputs into household production in the form of child care, and domestic productivity differences as determinants of across-household heterogeneity in second earner labour supply. The analysis highlights the importance of the elasticity of substitution between parental and non-parental child care in determining the relationship between utility and income across households. A central result is that taking account of a richer and more realistic specification of household time use widens the set of cases in which individual taxation is welfare-superior to joint taxation. NON-TECHNICAL SUMMARY In this paper we find that individual taxation is superior to joint taxation on both equity and efficiency criteria when the analysis of the optimal taxation of couples is based on a labour supply model that recognises the empirical importance of the allocation of time to child care. JEL Classification: J22, H21, H24, H31, D13