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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)

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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File URL: ftp://ftp.econ.au.dk/afn/wp/06/wp06_13.pdf
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Bibliographic 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/

Related research

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

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  1. Munch, Jakob R. & Rosholm, Michael & Svarer, Michael, 2006. "Home Ownership, Job Duration and Wages," IZA Discussion Papers 2110, Institute for the Study of Labor (IZA).
  2. Francesco Busato & Enrico Marchetti, 2006. "Skills, sunspots and cycles," Economics Working Papers 2006-07, School of Economics and Management, University of Aarhus.
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Cited by:
  1. Borger, Bruno De, 2011. "Optimal congestion taxes in a time allocation model," Transportation Research Part B: Methodological, Elsevier, vol. 45(1), pages 79-95, January.
  2. Mogens Fosgerau & Kurt Van Dender, 2013. "Road pricing with complications," Transportation, Springer, vol. 40(3), pages 479-503, May.

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