Francesca Parodi (Collegio Carlo Alberto)

“Taxation of Durables, Non-durables and Earnings with Heterogeneous Preferences”

Abstract: In this paper, I adopt a dynamic structural approach to study the design of consumption and personal income taxes and their interactions. I develop a life-cycle model of household consumption, saving and employment choices with multiple non-durable goods – necessities and luxuries – and partially irreversible durables. I estimate the model on micro data and use it to quantitatively characterize the optimal tax rates on different commodities and on labor income in a utilitarian framework and under alternative scenarios of preference heterogeneity. I find that durables should be subsidized in presence of pre commitment and uncertainty and that the optimal combination of taxes on nondurables and income crucially depends on the degree of preference heterogeneity. Allowing for government inequality aversion, I show that the model can rationalize the tax systems observed in reality and that differentiated consumption taxes serve a redistributive purpose jointly with the progressivity of labor income taxes.