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Reforming the Direct–Indirect Tax Mix

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Author Info
Michael Smart ()

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Abstract

This paper provides a new framework for evaluating the welfare effects of commodity tax reforms. It is shown that tax reforms are welfare improving if and only if they satisfy the following intuitive property: on average, consumer prices fall for commodities with high marginal excess burdens. The rule is then applied to analyze a shift from differentiated commodity taxation to direct flat-rate taxation of labour income. The welfare impact of such reforms can be decomposed into two effects: (i) the increase in welfare associated with substitution among taxed commodities, and (ii) the loss in welfare associated with substitution between commodities and leisure. On balance, a shift towards direct taxation is desirable when inter-commodity substitution effects are large relative to commodity–leisure substitution effects. The analysis allows us to reconcile the apparently conflicting results of the tax reform and optimal taxation literatures. Copyright Kluwer Academic Publishers 2002

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File URL: http://hdl.handle.net/10.1023/A:1014647403564
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Publisher Info
Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 9 (2002)
Issue (Month): 2 (March)
Pages: 143-155
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Handle: RePEc:kap:itaxpf:v:9:y:2002:i:2:p:143-155

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Web page: http://www.springerlink.com/link.asp?id=102915

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Related research
Keywords: uniform commodity taxation; tax reform; excess burden;

References listed on IDEAS
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  1. Sadka, Efraim, 1977. "A theorem on uniform taxation," Journal of Public Economics, Elsevier, vol. 7(3), pages 387-391, June. [Downloadable!] (restricted)
  2. Hatta, Tatsuo, 1986. "Welfare effects of changing commodity tax rates toward uniformity," Journal of Public Economics, Elsevier, vol. 29(1), pages 99-112, February. [Downloadable!] (restricted)
  3. Gordon, James P. F., 1991. "Tax reform and uniformity : Explaining the Hatta result," Journal of Public Economics, Elsevier, vol. 45(2), pages 257-261, July. [Downloadable!] (restricted)
  4. Smart, Michael, 1999. "A simple proof of the efficiency of the poll tax," Journal of Public Economics, Elsevier, vol. 71(3), pages 459-465, March. [Downloadable!] (restricted)
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  5. Besley, Timothy & Jewitt, Ian, 1995. "Uniform taxation and consumer preferences," Journal of Public Economics, Elsevier, vol. 58(1), pages 73-84, September. [Downloadable!] (restricted)
  6. Diamond, P. A. & McFadden, D. L., 1974. "Some uses of the expenditure function in public finance," Journal of Public Economics, Elsevier, vol. 3(1), pages 3-21, February. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Homburg, Stefan, 2004. "A New Approach to Optimal Commodity Taxation," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover dp-299, Universität Hannover, Wirtschaftswissenschaftliche Fakultät. [Downloadable!]
    Other versions:
  2. Yoshitomo Ogawa, 2007. "The optimal commodity tax structure in a four-good model," International Tax and Public Finance, Springer, vol. 14(6), pages 657-671, December. [Downloadable!] (restricted)
  3. José Sánchez Maldonado & Salvador Gómez Sala, 2006. "The Reform of Indirect Taxation in Spain: VAT and Excise," International Studies Program Working Paper Series, at AYSPS, GSU paper0607, International Studies Program, Andrew Young School of Policy Studies, Georgia State University. [Downloadable!]
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