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Indirect Taxes for Redistribution: Should Necessity Goods be Favored?

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  • Robin Boadway
  • Pierre Pestieau

Abstract

Atkinson and Stiglitz show that with weakly separability, differential commodity taxes are unnecessary given an optimal nonlinear income tax. Deaton showed that with an optimal linear progressive income tax, commodity taxes are superfluous under weakly separable and linear Engel curves. Using the latter case as an example, we derive two main results. If the income tax is less progressive than optimal, necessities should bear a lower tax rate than luxuries. If low-income households are income-constrained so cannot afford luxuries, it may be optimal to tax necessities at higher rates than luxuries, depending whether labor varies along the intensive or extensive margin.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3667.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3667

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Keywords: optimal income tax; Atkinson-Stiglitz Theorem; indirect taxes;

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  1. Jacobs, Bas, 2011. "The Marginal Cost of Public Funds is One," Working Paper Series, Center for Fiscal Studies 2011:7, Uppsala University, Department of Economics.
  2. Sheshinski, Eytan, 1972. "The Optimal Linear Income-Tax," Review of Economic Studies, Wiley Blackwell, vol. 39(3), pages 297-302, July.
  3. Richard Arnott & Bruce Greenwald & Ravi Kanbur & Barry Nalebuff (ed.), 2003. "Economics for an Imperfect World: Essays in Honor of Joseph E. Stiglitz," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262012057, December.
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