Taxation of Consumption and Labor Income: A Quantitative Approach

I quantitatively characterize optimal consumption and labor income taxes in a structural life-cycle model of household consumption, sav-ing, and employment choices that allows for irreversibility of dura-ble goods and preference heterogeneity. I find that durables should be subsidized and nondurables should be taxed at a uniform rate. The durable subsidy is driven by the life-cycle features of the model together with durables' irreversibility and borrowing constraints. Uniform taxation on nondurables holds under exogenous and endogenous-fully or weakly separable-labor supply and it relies on homogeneity of intertemporal preferences. Allowing for govern-ment's equity concerns, I show that the model rationalizes the tax practice. (JEL D15, G51, H21, H23, H24, H31, J22)