SFB 303 Discussion Paper No. A - 69
Author: Sandmo, Agnar
Title: Tax Distortions and Household Production
Abstract: Most of economic theory, including the theory of public finance, has been constructed on the assumption
of a sharp dichotomy between producers and customers; firms produce while individuals consume. The
theoretical and empirical fruitfulness of this dichotomy is beyond dispute. Still, the existence of household
production is also indisputable, and the „new“ theory of consumption has argued that explicit analysis of the
production activities of consumers can provide us with important new economic insights. The present paper
provides an application of the household production viewpoint to issues in tax policy arising from the fact that
the value of household production as such is untaxable in the sense in which this concept is used by Lerner
(1970); an assessment of the value of this output would only be possible at prohibitive administrative costs. This
raises issues both of positive theory, relating to the likely effects on households and on the economy of changes
in tax policy, and of normative theory, where the concern is with optimal tax design, given the untaxability of
household production.
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Creation-Date: 1986
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