Rules of Normalisation and their Importance for Interpretation of Systems of Optimal Taxation
AbstractThe 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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Bibliographic InfoPaper provided by School of Economics and Management, University of Aarhus in its series Economics Working Papers with number 2006-13.
Date of creation: 30 Dec 2006
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Web page: http://www.econ.au.dk/afn/
Public economics; optimal taxation; normalisation rules; p-complements; q-complements; distance function;
Find related papers by JEL classification:
- H2 - Public Economics - - Taxation, Subsidies, and Revenue
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-02-10 (All new papers)
- NEP-PBE-2007-02-10 (Public Economics)
- NEP-PUB-2007-02-10 (Public Finance)
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