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Optimal Linear Commodity Taxation under Optimal Non-Linear Income Taxation

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  • Bas Jacobs
  • Robin Boadway

Abstract

This paper analyzes optimal linear commodity taxes joint with non-linear income taxes. We provide optimal tax rules based on empirically observable elasticities. We demonstrate that commodities should be taxed/subsidized if doing so boosts labor supply. The critical role of commodity taxation is to alleviate distortions on labor supply caused by income taxation. In addition, we extend the standard formula for optimal non-linear income taxation for the presence of optimal linear commodity taxes. We correct parts of the literature that suggest that the optimal tax rules for commodity taxes derived by Atkinson and Stiglitz (1976, 1980) apply as well to linear tax commodity taxes. We show that the optimal second-best allocation cannot be implemented with linear commodity taxes and non-linear income taxes.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2013/wp-cesifo-2013-02/cesifo1_wp4142.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4142.

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Date of creation: 2013
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Handle: RePEc:ces:ceswps:_4142

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Related research

Keywords: Atkinson-Stiglitz Theorem; optimal non-linear income taxation; optimal linear and non-linear indirect taxation;

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References

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  1. Saez, Emmanuel, 2001. "Using Elasticities to Derive Optimal Income Tax Rates," Review of Economic Studies, Wiley Blackwell, vol. 68(1), pages 205-29, January.
  2. Tuomala, Matti, 1984. "On the optimal income taxation : Some further numerical results," Journal of Public Economics, Elsevier, vol. 23(3), pages 351-366, April.
  3. Sadka, Efraim, 1976. "On Income Distribution, Incentive Effects and Optimal Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 43(2), pages 261-67, June.
  4. A. B. Atkinson, 1977. "Optimal Taxation and the Direct versus Indirect Tax Controversy," Canadian Journal of Economics, Canadian Economics Association, vol. 10(4), pages 590-606, November.
  5. Christiansen, Vidar, 1984. "Which commodity taxes should supplement the income tax?," Journal of Public Economics, Elsevier, vol. 24(2), pages 195-220, July.
  6. Jukka Pirttilä & Ilpo Suoniemi, 2010. "Public Provision, Commodity Demand and Hours of Work: An Empirical Analysis," CESifo Working Paper Series 3000, CESifo Group Munich.
  7. Louis Kaplow, 2004. "On the Undesirability of Commodity Taxation Even When Income Taxation is Not Optimal," NBER Working Papers 10407, National Bureau of Economic Research, Inc.
  8. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  9. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 55-75.
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