Taxation of Consumption and Labor Income: A Quantitative Approach
American Economic Journal: Macroeconomics
vol. 15,
no. 4, October 2023
(pp. 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.Citation
Parodi, Francesca. 2023. "Taxation of Consumption and Labor Income: A Quantitative Approach." American Economic Journal: Macroeconomics, 15 (4): 177-216. DOI: 10.1257/mac.20200289Additional Materials
JEL Classification
- D15 Intertemporal Household Choice; Life Cycle Models and Saving
- G51 Household Finance: Household Saving, Borrowing, Debt, and Wealth
- H21 Taxation and Subsidies: Efficiency; Optimal Taxation
- H23 Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- H24 Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
- H31 Fiscal Policies and Behavior of Economic Agents: Household
- J22 Time Allocation and Labor Supply
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