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Optimal Taxation with Consumption Time as a Leisure or Labor Substitute

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  • Robin Boadway

    ()
    (Queen's University)

  • Firouz Gahvari

    ()
    (University of Illinois)

Abstract

This paper studies the optimal commodity taxation problem when time taken in consumption is a perfect substitute for either labor or leisure. It shows that while labor substitutability affects the optimal tax structure, leisure substitutability leaves the classical optimal tax results intact. In the Ramsey tax framework with linear income taxes, whether the consumers have the same or different earning abilities, labor substitutes tend to be taxed at a higher rate than leisure substitutes with the tax differential being increasing in consumption time. This is not necessarily the case when one allows for nonlinear income taxation.

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File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_1068.pdf
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Bibliographic Info

Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1068.

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Length: 41 pages
Date of creation: Jan 2006
Date of revision:
Publication status: Forthcoming in Journal of Public Economics
Handle: RePEc:qed:wpaper:1068

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Keywords: consumption time; labor substitutes; leisure substitutes; optimal taxation;

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References

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  1. Cremer, Helmuth & Gahvari, Firouz, 1997. "In-kind transfers, self-selection and optimal tax policy," European Economic Review, Elsevier, vol. 41(1), pages 97-114, January.
  2. Firouz Gahvari, 2007. "On Optimal Commodity Taxes When Consumption Is Time Consuming," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 9(1), pages 1-27, 02.
  3. Kleven, Henrik Jacobsen, 2004. "Optimum taxation and the allocation of time," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 545-557, March.
  4. Auerbach, Alan J. & Hines, James Jr., 2002. "Taxation and economic efficiency," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 21, pages 1347-1421 Elsevier.
  5. Kelvin J. Lancaster, 1966. "A New Approach to Consumer Theory," Journal of Political Economy, University of Chicago Press, vol. 74, pages 132.
  6. Henrik Jacobsen Kleven & Wolfram F. Richter & Peter Birch Sørensen, . "Optimal Taxation with Household Production," EPRU Working Paper Series 99-12, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  7. Sandmo, Agnar, 1974. "A Note on the Structure of Optimal Taxation," American Economic Review, American Economic Association, vol. 64(4), pages 701-06, September.
  8. Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers 22, Massachusetts Institute of Technology (MIT), Department of Economics.
  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.
  10. Deaton, Angus, 1977. "Equity, efficiency, and the structure of indirect taxation," Journal of Public Economics, Elsevier, vol. 8(3), pages 299-312, December.
  11. P. A. Diamond, 1975. "A Many-Person Ramsey Tax Rule," Working papers 146, Massachusetts Institute of Technology (MIT), Department of Economics.
  12. Bergstrom, T. & Blomquist, S., 1993. "The Political Economy of Subsidized Day Care," Papers 93-30, Michigan - Center for Research on Economic & Social Theory.
  13. Firouz Gahvari & C.C. Yang, 1993. "Optimal Commodity Taxation and Household Consumption Activities," Public Finance Review, , vol. 21(4), pages 479-487, October.
  14. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production II: Tax Rules," American Economic Review, American Economic Association, vol. 61(3), pages 261-78, June.
  15. K. K. Lancaster, 2010. "A New Approach to Consumer Theory," Levine's Working Paper Archive 1385, David K. Levine.
  16. Ted Bergstrom & Soren Blomquist, 1994. "Political Economy of Subsidized Day Care," Public Economics 9401001, EconWPA.
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Cited by:
  1. Russo, Antonio, 2012. "Pricing of Transport Networks, Redistribution and Optimal Taxation," TSE Working Papers 12-353, Toulouse School of Economics (TSE).
  2. Peter Sørensen, 2007. "The theory of optimal taxation: what is the policy relevance?," International Tax and Public Finance, Springer, vol. 14(4), pages 383-406, August.
  3. Borger, Bruno De, 2011. "Optimal congestion taxes in a time allocation model," Transportation Research Part B: Methodological, Elsevier, vol. 45(1), pages 79-95, January.
  4. Jean Lim & Carolina Rodríguez-Zamora, 2010. "The Optimal Tax Rule in the Presence of Time Use," Working Papers 2010-05, Banco de México.
  5. Marcelo Arbex & Enlinson Mattos, 2013. "Optimal Sales Tax Rebates and Tax Enforcement Consumers," Working Papers 1302, University of Windsor, Department of Economics.

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