The Household, Time Use and Tax Policy

Abstract

This paper is concerned with modelling household decisions and the welfare effects of tax policy. It seeks to emphasise the importance of a model that incorporates household production and can take account of the evident female labour supply heterogeneity across two-parent families. If, after having children, some proportion of households substitute domestic for market labour supply, the income and consumption variables used as the tax base in most countries may be poorly correlated with living standards. Taxes and welfare programs based on these variables may increase inequality by shifting the overall tax burden to low and middle wage families with both partners in work, away from families with much higher wages and in which only one member works to earn the same joint market income. The paper combines data on time use, income, taxes and benefits to show how they track female labour supply over the life cycle, resulting in much higher tax burdens on two-earner households. (JEL D13, D91, H31, J22)