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Tax Luxury or Necessity

Author

Listed:
  • Chia-Hui Lu

    (Department of Economics, National Taipei University)

Abstract

This paper studies the optimal taxation between luxury and necessity goods. We set up a three-production-sector neoclassical growth model with inelastic labor supply, and analyze the tax incidence. We find that the two consumption taxes are neutral to economic growth and that the welfare maximization optimal tax mix involves levying the same rate on those two goods. In reality, the tax rate levied on the luxury good is usually higher, so that the government should reduce the tax rate on the luxury good and raise that on the necessity good to the same level in order to enhance the household's lifetime welfare.

Suggested Citation

  • Chia-Hui Lu, 2012. "Tax Luxury or Necessity," Economics Bulletin, AccessEcon, vol. 32(1), pages 952-959.
  • Handle: RePEc:ebl:ecbull:eb-11-00680
    as

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    File URL: http://www.accessecon.com/Pubs/EB/2012/Volume32/EB-12-V32-I1-P90.pdf
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    References listed on IDEAS

    as
    1. Finn E. Kydland & Edward C. Prescott, 1991. "Hours and Employment Variation in Business-Cycle Theory," International Economic Association Series, in: Niels Thygesen & Kumaraswamy Velupillai & Stefano Zambelli (ed.), Business Cycles, chapter 5, pages 107-134, Palgrave Macmillan.
    2. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-622, May.
    3. Bagwell, Laurie Simon & Bernheim, B Douglas, 1996. "Veblen Effects in a Theory of Conspicuous Consumption," American Economic Review, American Economic Association, vol. 86(3), pages 349-373, June.
    4. Ng, Yew-Kwang, 1987. "Diamonds Are a Government's Best Friend: Burden-Free Taxes on Goods Valued for Their Values," American Economic Review, American Economic Association, vol. 77(1), pages 186-191, March.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    consumption tax; tax incidence; optimal taxation.;
    All these keywords.

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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