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UBC Theses and Dissertations

The optimal taxation of families Brett, Craig

Abstract

This thesis presents an analysis of two classical problems in the theory of optimal taxation: commodity tax reform and nonlinear income taxation. Economic behavior is modeled as arising out of a family decision making process rather than owing to individual utility maximization. The taxation authority is assumed to have no direct control over intra-family allocations of ^resources. In this way, family interactions change the nature of the second-best constraints the planner faces. The analysis focuses on the impact of these constraints on optimal policy choices. Attention is focused on families with two members, whom the planner can (in most situations that are modeled) tell apart. In the chapters dealing with commodity tax reform, behaviour is modeled as the Pareto-efficient outcome of a family decision process. Conditions for the existence of a feasible, Pareto-improving tax change are presented and contrasted with those that obtain in the individualistic case. The consequences of treating households as a single individual are also discussed. It is shown that treating families as if they were individuals can lead to misleading conclusions. An example is presented to demonstrate that the traditional analysis may go wrong even when families behave as if they are individuals. Moreover, it is shown that household budget data alone is insufficient to address this issue. The model is then put to use to address question of temporary inefficiencies in tax reform. I present how the circumstances under which temporary inefficiencies can arise vary with the structure of poll taxes. The problem faced by a planner choosing an income tax schedule for families is modeled as a multi-dimensional screening problem. Families are described by a two-dimensional vector of characteristics, interpreted as the labour productivities of their members. The planner cannot observe these characteristics directly. Furthermore, families are free to redistribute the after-tax incomes of their members. The planner must take this behaviour into account when choosing the tax schedule. A description of the possible Pareto-efficient mechanisms is given. The implications of a standard redistributive assumption on the sign of marginal tax rates are explored. In contrast to uni-dimensional taxation models, the redistributive assumption does not imply that marginal tax rates are everywhere non-negative. For much of the analysis, the usual assumption of quasi-linear preferences is jettisoned, allowing an exploration of the implications of this additional structure. The qualitative features of optimal tax- schedules are discussed. It is concluded that neither individual-based taxation nor taxation based solely on total family income is optimal.

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