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Commodity Taxation and Social Welfare: The Generalized Ramsey Rule

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  • David Coady

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  • Jean Drèze
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    Abstract

    Commodity taxes have three distinct roles: (1) revenue collection, (2) interpersonal redistribution, and (3) resource allocation. The paper presents an integrated treatment of these three concerns in a second-best general equilibrium framework, which leads to the “generalized Ramsey rule” for optimum taxation. We show how many standard results on optimum taxation and tax reform have a straightforward counterpart in this general framework. Using this framework, we also try to clarify the notion of “deadweight loss,” as well as the relation between alternative distributional assumptions and the structure of optimum taxes. Copyright Kluwer Academic Publishers 2002

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    File URL: http://hdl.handle.net/10.1023/A:1016240915589
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    Bibliographic Info

    Article provided by Springer in its journal International Tax and Public Finance.

    Volume (Year): 9 (2002)
    Issue (Month): 3 (May)
    Pages: 295-316

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    Handle: RePEc:kap:itaxpf:v:9:y:2002:i:3:p:295-316

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

    Related research

    Keywords: commodity taxation; efficiency; redistribution; shadow prices;

    References

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    1. Diamond, P. A., 1975. "A many-person Ramsey tax rule," Journal of Public Economics, Elsevier, vol. 4(4), pages 335-342, November.
    2. Ahmad,Etisham & Stern,Nicholas, 1991. "The Theory and Practice of Tax Reform in Developing Countries," Cambridge Books, Cambridge University Press, number 9780521397421.
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    4. Auerbach, Alan J., 1985. "The theory of excess burden and optimal taxation," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 2, pages 61-127 Elsevier.
    5. Persson, Torsten & Tabellini, Guido, 2002. "Political economics and public finance," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 24, pages 1549-1659 Elsevier.
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    11. David Coady, 1997. "Agricultural Pricing Policies in Developing Countries: An Application to Pakistan," International Tax and Public Finance, Springer, vol. 4(1), pages 39-57, January.
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    15. Dreze, Jean & Stern, Nicholas, 1987. "The theory of cost-benefit analysis," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 2, chapter 14, pages 909-989 Elsevier.
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    18. Hoff, Karla, 1994. "The second theorem of the second best," Journal of Public Economics, Elsevier, vol. 54(2), pages 223-242, June.
    19. Dixit, Avinash, 1985. "Tax policy in open economies," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 6, pages 313-374 Elsevier.
    20. Kay, J. A., 1980. "The deadweight loss from a tax system," Journal of Public Economics, Elsevier, vol. 13(1), pages 111-119, February.
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    Cited by:
    1. David Coady, 2006. "The Welfare Returns to Finer Targeting: The Case of The Progresa Program in Mexico," International Tax and Public Finance, Springer, vol. 13(2), pages 217-239, May.
    2. Stefan Homburg, 2006. "A New Approach to Optimal Commodity Taxation," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 62(3), pages 323-338, September.
    3. Bucci, Alberto & Florio, Massimo & La Torre, Davide, 2012. "Government spending and growth in second-best economies," Economic Modelling, Elsevier, vol. 29(3), pages 654-663.

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