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Direct versus indirect taxation: the design of the tax structure revisited Author info | Abstract | Publisher info | Download info | Related research | Statistics CREMER, Helmuth
PESTIEAU, Pierre
ROCHET, Jean-Charles
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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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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 1999Date of revision:
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Article Cremer, Helmuth & Pestieau, Pierre & Rochet, Jean-Charles, 2001.
"Direct versus Indirect Taxation: The Design of the Tax Structure Revisted ,"
International Economic Review ,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(3), pages 781-99, August.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile , click on "citations" and make appropriate adjustments.: Atkinson, A. B. & Stiglitz, J. E., 1976.
"The design of tax structure: Direct versus indirect taxation ,"
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[Downloadable!] (restricted)
Cremer, Helmuth & Gahvari, Firouz, 1995.
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Stiglitz, Joseph E., 1987.
"Pareto efficient and optimal taxation and the new new welfare economics ,"
Handbook of Public Economics ,
in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 2, chapter 15, pages 991-1042
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Other versions:
Full
references Cited by : (explanations , Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile , click on "citations" and make appropriate adjustments.)
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[Downloadable!] (restricted) Helmuth Cremer & ) & Pierre Pestieau, 2004.
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[Downloadable!] Helmuth Cremer & Pierre Pestieau, 2003.
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[Downloadable!] Helmuth Cremer & ) & Pierre Pestieau, 2003.
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CREMER, Helmuth & PESTIEAU, Pierre & ROCHET, Jean-Charles, 2001.
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