On the Taxation of Trade Within and Between Households

Tax reform proposals affect individual welfares in ways which strongly depend on the nature of specialisation in household production and the pattern of trade within households. Variation in the degree of specialisation in domestic production across households strongly influences the impacts on individual tax burdens of a given tax reform. The standard models of the economics literature cannot be used to analyse these issues because they ignore the two-person nature of households and the existence of household production and trade. This paper proposes a simple and tractable model to remedy this and uses it to analyse the impacts of the types of tax reform that have been the subject of recent policy debate.