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  3. American Economic Journal: Macroeconomics
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  5. Taxation of Consumption and Labor Income: A Quantitative Approach

Taxation of Consumption and Labor Income: A Quantitative Approach

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 non-durables 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 non-durables 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.

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