Keywords: overlapping generations, income taxation, population growth, home production, fiscal policy, population policy
Taxation of labour and capital income in an OLG model with home production and endogenous fertility
Many developing countries are characterised by a large share of home production. Households allocate their time on both market and non-market activities. The introduction of a tax on labour or capital income induces people to divert from market production to home production. Furthermore, children are often used as an input into home production. In this situation, a higher tax rate on capital income causes not only a decrease in the capital intensity but also an increase in the population growth rate. The effects of a wage tax on economic development are shown to depend on the opportunity costs of raising children. For reasonable parameter values of the tax rate, labour income taxation will reduce capital accumulation and cause a rise in home production. As a result fiscal policy should be combined with population policies.