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Production Efficiency and the Direct-Indirect Tax Mix

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  • Charles Blackorby
  • Craig Brett

Abstract

In the design of the optimal direct/indirect tax mix, the canonical view was laid by Atkinson and Stiglitz (1976) who showed that commodity taxes are unnecessary in an economy in which there is an optimal nonlinear income tax provided that commodities are separable from labor in the utility functions of all taxpayers, that the aggregators over these commodities are ordinally equivalent and that wages are fixed. When wages are endogenous, Naito (1999) showed that this result may not hold and in addition that production efficiency may not be Pareto optimal. Given an optimal nonlinear income tax, we show that production inefficiency is Pareto optimal if the aggregate technology set is strictly concave. The Atkinson-Stiglitz condition is neither necessary nor sufficient for zero commodity taxation and commodity taxes are part of almost all Pareto optima. Copyright 2004 Blackwell Publishing Inc..

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Article provided by Association for Public Economic Theory in its journal Journal of Public Economic Theory.

Volume (Year): 6 (2004)
Issue (Month): 1 (02)
Pages: 165-180

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Handle: RePEc:bla:jpbect:v:6:y:2004:i:1:p:165-180

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Cited by:
  1. DarĂ­o Maldonado, 2008. "Education policies and optimal taxation," International Tax and Public Finance, Springer, Springer, vol. 15(2), pages 131-143, April.
  2. Sebastian Kessing & Chiara Strozzi, 2012. "The Regional Distribution of Public Employment: Theory and Evidence," Department of Economics, University of Modena and Reggio E., Faculty of Economics "Marco Biagi" 0682, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".
  3. Alan Krause, 2012. "Optimal Savings Taxation when Individuals have Different CRRA Utility Functions," Discussion Papers, Department of Economics, University of York 12/13, Department of Economics, University of York.

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