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.

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. / Arts, Faculty of / Vancouver School of Economics / Graduate

In a progressive income tax system with an individual tax unit, high-rate taxpayers have an incentive to split income with lower-rate family members to minimise the family’s total tax burden. This raises equity and neutrality concerns. Adopting a spousal tax unit limits the gains from income splitting, but the individual is the better choice on privacy, autonomy, equality, definitional, marriage neutrality and work incentive grounds. Once the individual is chosen as the income tax unit, the control model provides a strong policy basis for attributing both earned and unearned income to individuals. Income splitting, however, undermines this model as well as the individual tax unit. This thesis focuses on the UK’s approach to income-splitting in family businesses. The relevant UK income tax rules, particularly the settlements provisions, are inadequate for the task. Various possible reforms are examined. Incorporating a transfer pricing or ‘reasonableness’ test into the settlements provisions would strengthen these rules, but would make taxpayer compliance with an uncertain regime even more difficult. Another option is to expand the scope of employment tax by moving the borderline between employees and the self-employed or companies. Deeper structural reforms could be made to enhance the neutrality of taxation on different legal forms of economic activity. This would reduce the incentives to incorporate for tax savings, including from income splitting. Integration of income tax and NICs is one such option; a dual income tax is another. A TAAR or GAAR also could be pursued. Ultimately, some combination of these various reform options could provide a partial solution to this challenging issue.