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Direct versus indirect taxation: the design of the tax structure revisited

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  • CREMER, Helmuth

    (IDEI and GREMAQ, University of Toulouse and Institut Universitaire de France)

  • PESTIEAU, Pierre

    () (CREPP, University of Liège, CORE and DELTA)

  • ROCHET, Jean-Charles

    (IDEI and GREMAQ, University of Toulouse and Institut Universitaire de France)

Abstract

This paper studies the optimal direct/indirect tax mix in a setting where individuals differ in several unobservable characteristics (productivity and endowments). Tax instruments (income and commodity taxes) are constrained solely by the information structure. It presents general expressions for the optimal commodity tax rates and proves that contrary to Atkinson and Stiglitz's (1976) result, differential commodity taxation remains a useful instrument of optimal tax policy even if preferences are separable between labor and produced goods. The following, more specific, results are also derived. First, when cross substitution effects are small the expressions resemble traditional (many households) Ramsey rules. Second, if differences in endowments are confined to some of the goods, the tax rate on goods in which endowments are zero is positively related to income elasticity. Finally, in a Cobb-Douglas illustration with two goods, where endowments differ only in good 1 (and are interpreted as "wealth"), the tax on good 2 provides an indirect way to tax the unobservable wealth. It is higher (i) the more significant are the wealth differentials, (ii) the stronger is the correlation between wealth and earning ability and (iii) the larger are the (political) weights attached to low wealth individuals.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 1999010.

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Date of creation: 01 Feb 1999
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Handle: RePEc:cor:louvco:1999010

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References

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  1. CREMER, Helmuth & FOURGEAUD, Virginie & LEITE MONTEIRO, Manuel & MARCHAND, Maurice, 1995. "Mobility and Redistribution : A Survey," CORE Discussion Papers 1995066, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. J. A. Mirrlees, 1976. "Optimal Tax Theory: A Synthesis," Working papers 176, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Joseph E. Stiglitz, 1988. "Pareto Efficient and Optimal Taxation and the New New Welfare Economics," NBER Working Papers 2189, National Bureau of Economic Research, Inc.
  4. Cremer, Helmuth & Gahvari, Firouz, 1997. "In-Kind Transfers, Self-Selection and Optimal Tax Policy," Open Access publications from University of Toulouse 1 Capitole http://neeo.univ-tlse1.fr, University of Toulouse 1 Capitole.
  5. Robin Boadway & Michael Keen, 1991. "Public Goods, Self-Selection and Optimal Income Taxation," Working Papers 828, Queen's University, Department of Economics.
  6. Guesnerie,Roger, 1998. "A Contribution to the Pure Theory of Taxation," Cambridge Books, Cambridge University Press, number 9780521629560.
  7. Craig Brett, 2007. "Optimal nonlinear taxes for families," International Tax and Public Finance, Springer, vol. 14(3), pages 225-261, June.
  8. CREMER, Helmuth & PESTIEAU, Pierre, 1995. "Redistributive Taxation and Social Insurance," CORE Discussion Papers 1995054, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  9. Boadway, Robin & Marchand, Maurice, 1995. "The Use of Public Expenditures for Redistributive Purposes," Oxford Economic Papers, Oxford University Press, vol. 47(1), pages 45-59, January.
  10. Naito, Hisahiro, 1999. "Re-examination of uniform commodity taxes under a non-linear income tax system and its implication for production efficiency," Journal of Public Economics, Elsevier, vol. 71(2), pages 165-188, February.
  11. Arrondel, L. & Masson, A. & Pestieau, P., 1996. "Bequest and inheritance: empirical issues and France-U.S. comparison," DELTA Working Papers 96-19, DELTA (Ecole normale supérieure).
  12. Browning, Martin & Meghir, Costas, 1991. "The Effects of Male and Female Labor Supply on Commodity Demands," Econometrica, Econometric Society, vol. 59(4), pages 925-51, July.
  13. 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.
  14. Cremer, H. & Gahvari, F., 1996. "On Optimal Taxation of Housing," Papers 96.417, Toulouse - GREMAQ.
  15. Boadway, Robin & Marchand, Maurice & Sato, Motohiro, 1998. " Subsidies versus Public Provision of Private Goods as Instruments for Redistribution," Scandinavian Journal of Economics, Wiley Blackwell, vol. 100(3), pages 545-64, September.
  16. Robin W. Boadway & Maurice Marchand, 1990. "The Use of Public Expenditure for Distributive Purpose," Working Papers 796, Queen's University, Department of Economics.
  17. Cremer, Helmuth & Gahvari, Firouz, 1995. "Uncertainty, Optimal Taxation and the Direct versus Indirect Tax Controversy," Economic Journal, Royal Economic Society, vol. 105(432), pages 1165-79, September.
  18. Stiglitz, Joseph E., 1982. "Self-selection and Pareto efficient taxation," Journal of Public Economics, Elsevier, vol. 17(2), pages 213-240, March.
  19. Armstrong, Mark & Rochet, Jean-Charles, 1999. "Multi-dimensional screening:: A user's guide," European Economic Review, Elsevier, vol. 43(4-6), pages 959-979, April.
  20. 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.
  21. Jean-Charles Rochet, 1991. "Incentives, Redistribution and Social Insurance," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 16(2), pages 143-165, December.
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