Joseph Bankman (Stanford), Jacob Goldin (Chicago), Adam Kern (San Diego), and Ana Vasilj (Chicago) have posted “Buy or D.I.Y.: Home Production and the Income Tax” on SSRN (and forthcoming in the Columbia Law Review). Here is the abstract:
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 childcare, housecleaning, or meals, 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, closing the gap between the home and the market appears to be regressive.
This Article reframes the debate by asking how home production should feature in a tax system that seeks to redistribute from the rich to the poor. Our central claim is that an ideal redistributive tax system would indeed tax home production or subsidize market goods that substitute for it. This claim might seem counterintuitive, since the poor do more home production than the rich. But we show that engaging in home production often reveals that one has relatively high earning ability, functioning as what optimal tax theory calls a “tag” for high ability. When home production is a tag for high ability, pairing a tax on it-or a subsidy for its market substitutes-with an offsetting adjustment to income tax rates improves the efficiency of redistribution.
The practical path forward is to subsidize many market goods that substitute for home production, typically through refundable tax credits. We develop a unified conceptual framework that provides guidance on when such subsidies are warranted and how they should be designed.
