additional information on ability and hence indirect taxes cannot be used to relax the incentive compatibility constraint.

The latter case emphasizes the importance of the assumption of homogeneous tastes. In contrast, if individuals have heterogeneous tastes then a higher and lower ability individual earning the same income would no longer consume the exact same bundle of goods, and so consumption patterns may once again provide information about ability. Mirrlees (1976), Saez (2002) and Gauthier and Henriet (2018) consider models with heterogeneous tastes. They show that if tastes depend on ability, then a higher indirect tax should, in general, be imposed on a good if higher ability individuals have a relatively strong taste for that good.<sup>19</sup> Another strand of literature has considered the impact of home production on optimal tax rates. Kleven et al. (2000) develop a single representative consumer model incorporating home production. This effectively produces a modified Corlett and Hague (1953) rule where the tax distortion favoring (untaxed) home production pushes down the optimal tax rate on consumer services that are substitutes for home production (e.g. house repairs, cleaning services). Where goods and services are equally complementary with leisure (so that uniform taxation would otherwise be optimal), they show that substitutes for home production should unequivocally face a relatively low tax rate. Piggott and Whalley (2001) develop a very similar model incorporating home production. They simulate their model based on Canadian data and find that Canada’s 1990 VAT reform that brought consumer services into the indirect tax net was welfare reducing.<sup>20</sup> Kleven (2004) and Boadway and Gahvari (2006) consider models where both goods and time must be allocated. Kleven (2004) finds that market goods that take more time to be consumed should be taxed more heavily than those that take less time, or those that save time. Boadway and Gahvari (2006) find that goods that are less pleasurable to consume should be taxed more heavily than those that are more pleasurable and that, for less pleasurable goods, those that take longer to be consumed should be taxed more heavily. As Crawford et al. (2010) note, intuitively this is once again acting to reduce tax-induced disincentives to engage in market work, but additionally recognizing that it is preferable to spend any given amount of time in a pleasurable activity as compared to an unpleasurable one. They give the example that DVDs (which are pleasurable but time consuming) should be taxed less heavily than ironing boards (as ironing is dull and time consuming).

A key question arising from the above literature is whether preferences between consumption and leisure are in fact weakly separable. Unfortunately, only a small number of empirical studies have examined this question. Browning and Meghir (1991) and Crawford et al. (2010) estimate demand systems for the United Kingdom and both reject weak separability – suggesting a role for differential taxation. Crawford et al. (2010), for example, find that most food products, fuels, tobacco, children’s clothing and public transport are complements with leisure. Meanwhile, alcoholic drinks, food eaten out, motor fuels and leisure goods are complements with work.<sup>21</sup>

> 19 Cremer et al. (2001) also show a role for differential taxation if individuals have different initial endowments of goods.

> 20 Cremer and Gahvari (2015) also show in an Atkinson and Stiglitz (1976) framework that weak separability in preferences between consumption and leisure is no longer sufficient for uniformity when there is household production. However, if preferences are weakly-separable in market goods versus leisure and household production, then uniformity becomes optimal.

> 21 Crawford et al. (2010) suggest the latter result may reflect the use of leisure goods as substitutes for time spent producing relaxation, as per the arguments in Kleven (2004) and Boadway and Gahvari (2006).

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