The neglect of administrative issues is a serious limitation of optimal tax theory, with implications for its practical applicability. Under uncertainty, the problems for optimal tax theory are compounded when the full set of tax instruments is neglected. These twin issues are addressed in this paper, by focussing on a fundamental implication of administrative problems, namely, that the tax bases are measured with some error. Consumption taxes can perform the ‘social insurance role of taxation’; a role previously ascribed only to income taxes. A combination of income and consumption taxes can hedge income and measurement-error risks better, relative to the imposition of these taxes alone. The optimal taxes are decreasing in the imprecision with which the corresponding tax base is measured. The taxpayer engages in precautionary savings, in response to uncertainty arising on account of income and measurement problems. Differential commodity taxes, tailored to the measurability characteristics of the different tax bases, dominate uniform commodity taxes. Furthermore, the paper provides a simple, tractable framework for optimal tax theorists interested in diverse kinds of uncertain situations.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
file. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by Department of Economics, University of Leicester in its series Discussion Papers in Economics with number
05/25.
Length: Date of creation: Aug 2005 Date of revision: Handle: RePEc:lec:leecon:05/25
Contact details of provider: Postal: Department of Economics University of Leicester, University Road. Leicester. LE1 7RH. UK Phone: +44 (0)116 252 2887 Fax: +44 (0)116 252 2908 Email: Web page: http://www.le.ac.uk/economics/
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.:
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.)