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The increase in income needed for working households to escape relative poverty may be achieved either by their supplying more hours of paid work on the labor market, or by policy makers adjusting income taxation, minimum wages, and social transfers targeted at such households. While the literature has paid considerable attention to the other two 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 the decision of households 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.
