Optimal Taxation, Child Care and Models of the Household

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Abstract

This paper presents for the …rst time the properties of optimal piece-
wise 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 di¤erences, variation in prices of bought-
in inputs into household production in the form of child care, and domestic
productivity di¤erences as determinants of across-household heterogene-
ity 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 speci…cation of household time use widens the set of cases in
which individual taxation is welfare-superior to joint taxation.

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