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How Should Commodities be Taxed? A Counterargument to the Recommendation in the Mirrlees Review

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  • Spencer Bastani
  • Sören Blomquist
  • Jukka Pirttilä

Abstract

The Mirrlees Review recommends that commodity taxation should in general be uniform, but with some goods consumed in conjunction with labour supply (such as child care) left untaxed. This paper examines the validity of this claim in an optimal income tax framework. Contrary to the recommendation of the Review, our theoretical results imply that even if all goods other than the good needed for working are separable from leisure, the optimal tax on these goods should not be uniform. Instead, goods with larger expenditure elasticities should be discouraged relatively more by the tax system. If the government fully subsidises the cost of the good needed for working, then commodity taxation is uniform under the standard separability assumption. Our results imply that the optimal commodity tax system is dependent on the expenditure side of the government. A calibration exercise presented in the paper suggests that these results can be quantitatively important.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4240.

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Date of creation: 2013
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Handle: RePEc:ces:ceswps:_4240

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Related research

Keywords: income taxation; commodity taxation; public provision; separability;

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References

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  1. Richard Blundell & Andrew Shephard, 2008. "Employment, hours of work and the optimal taxation of low income families," IFS Working Papers, Institute for Fiscal Studies W08/01, Institute for Fiscal Studies.
  2. Spencer Bastani & Sören Blomquist & Luca Micheletto, 2010. "Public Provision of Private Goods, Tagging and Optimal Income Taxation withHeterogeneity in Needs," CESifo Working Paper Series 3275, CESifo Group Munich.
  3. Browning, Martin & Meghir, Costas, 1991. "The Effects of Male and Female Labor Supply on Commodity Demands," Econometrica, Econometric Society, Econometric Society, vol. 59(4), pages 925-51, July.
  4. J. A. Mirrlees, 1976. "Optimal Tax Theory: A Synthesis," Working papers 176, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Sören Blomquist & Vidar Christiansen & Luca Micheletto, 2008. "Public Provision of Private Goods and Nondistortionary Marginal Tax Rates," CESifo Working Paper Series 2303, CESifo Group Munich.
  6. Emmanuel Saez, 2000. "The Desirability of Commodity Taxation under Non-Linear Income Taxation and Heterogeneous Tastes," NBER Working Papers 8029, National Bureau of Economic Research, Inc.
  7. Eric Bonsang, 2006. "How do middle-aged children allocate time and money transfers to their older parents in Europe?," CREPP Working Papers 0602, Centre de Recherche en Economie Publique et de la Population (CREPP) (Research Center on Public and Population Economics) HEC-Management School, University of Liège.
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Cited by:
  1. John T. Revesz, 2014. "A computational model of optimal commodity taxation," Public Finance Research Papers, Istituto di Economia e Finanza, DIGEF, Sapienza University of Rome 4, Istituto di Economia e Finanza, DIGEF, Sapienza University of Rome.

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