Optimal Income Taxation for the Alleviation of Working-Poverty When Domestic Work is Rewarded

The increase in income needed for working households to escape relative poverty
may be achieved either by households supplying more hours of paid work on the
labor market, or by policy makers adjusting income taxation, minimum wages and
social transfers targeted at working households. While past work has given considerable attention to the latter policy instruments, theoretical work on how income
taxation could minimize working-poverty is scarce. Our study aims to fill this
gap. Unlike the traditional optimal income taxation literature, which considers
that households allocate time only between consumption and leisure, we explicitly
model households’ decisions as including domestic work, which is a social contribution and should be rewarded. This new framework highlights (i) the importance of emphasizing the difference between domestic work and real leisure and, (ii) the policy implications of non-market time allocation.