Adam Kern (San Diego) presents Buy or D.I.Y.: Home Production and the Income Tax today at UCLA, as part of its Colloquium on Tax Policy and Public Finance:

The income tax aspires to be comprehensive—a tax on “all income, from whatever source derived.” Yet every year, trillions of dollars of productive activity escapes taxation with hardly any notice: the work people do for themselves outside of the market. When people purchase goods or services such as meals, childcare, or housecleaning, they must do so with after-tax dollars. But when they produce the same goods and services at home, their labor is untaxed. The result is a systematic tilt in favor of home production and against market exchange. Tax scholars have long recognized this distortion, but efforts to correct it have produced an impasse: Failing to tax home production is inefficient, yet because the poor engage in more home production, reforms that would correct the tax imbalance appear to be regressive.

This Article reframes the debate by asking whether and how a tax system might account for home production to more efficiently redistribute resources from rich to poor. Drawing on new advances in optimal tax theory, we study this question by developing a unified conceptual framework in which home production functions as an informational signal—a “tag”—about earning ability. Although the income tax could, in principle, apply to home production directly, the practical path forward lies in subsidizing the market goods and services that people buy as substitutes for home production. We use our framework to shed light on when such subsidies are warranted and on how they should be designed, concluding that they should often take the form of refundable tax credits.

Our results dramatically challenge conventional wisdom about how to construct an income tax. It is not “clearly unacceptable” to subsidize personal expenditures that free up time. To the contrary, helping people to afford such goods can make the tax system more equitable and more efficient.