Optimal Income Taxation and Disability Insurance for Households with Intra-Household Care

This paper characterizes the optimal income tax and disability insurance (DI) in the presence of formal and informal care for disabled people provided within households. In the model, each household is comprised of a disabled member and an able member who can provide “intra-household care” for the disabled member. Moreover, both the ability of able members and the level of disability of disabled members are heterogeneous across households. I …rst show that the intra-household care increases labor supply of disabled agents by reducing negative e¤ects of disability on their labor supply. I also …nd that under reasonable assumptions optimal DI bene…ts are positive and progressive with respect to household earnings. Both features can be interpreted as redistribution mechanisms: positivity as the redistribution from the mildly disabled to the severely disabled, and progressivity as the redistribution from the more productive to the less productive.