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Rules of Normalisation and their Importance for Interpretation of Systems of Optimal Taxation

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Author Info
Knud Jørgen Munk () (School of Economics and Management, University of Aarhus, Denmark)

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Abstract

The adoption of proper rules of normalisation is in general considered a trivial problem which deserves little attention. Possibly for that very reason errors in normalisation have resulted in flawed interpretations of the conditions for optimal commodity taxation. We state based on an explicit representation of the general equilibrium conditions the rules of normalisation in standard optimal tax models. This allows us to provide an intuitive explanation of what determines the optimal tax system. Finally, we review a number of examples where lack of precision with respect to normalisation in otherwise important contributions to the literature on optimal taxation has given rise to misinterpretations of of analytical results.

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Publisher Info
Paper provided by School of Economics and Management, University of Aarhus in its series Economics Working Papers with number 2006-13.

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Length: 19
Date of creation: 30 Dec 2006
Date of revision:
Handle: RePEc:aah:aarhec:2006-13

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Web page: http://www.econ.au.dk/afn/

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Related research
Keywords: Public economics; optimal taxation; normalisation rules; p-complements; q-complements; distance function;

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H2 - Public Economics - - Taxation, Subsidies, and Revenue

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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. Jakob Roland Munch & Michael Rosholm & Michael Svarer, 2006. "Home Ownership, Job Duration, and Wages," Economics Working Papers 2006-06, School of Economics and Management, University of Aarhus. [Downloadable!]
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  2. Francesco Busato & Enrico Marchetti, 2006. "Skills, sunspots and cycles," Economics Working Papers 2006-07, School of Economics and Management, University of Aarhus. [Downloadable!]
    Other versions:
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