Household Saving, Time Allocation and Taxation

Abstract

Current discussions of tax policy and pension reform are very much concerned with the implications of policy changes for household saving. This paper analyses these issues in the context of a model which recognises that households typically consist of two individuals who jointly take decisions on saving and labour supply, and that an important issue in evaluating the impact of policy change arises out of the fact that labour supplies of secondary earners vary substantially across households. We show that, when we take account of this, the conventional wisdom about the effects on household saving of tax changes which increase inequality of after-tax incomes may not hold. Given certain plausible stylised facts about labour supply elasticities, reductions in the higher tax rates, financed by increases in the lower tax rates, can reduce saving, as well as welfare overall.