We analyze how constitutional restrictions on tax bases within a federation affect the nature of Pareto-improving directions of tax reform and the design of optimal federal taxes. We show that constraints on federal taxation entail production inefficiency at the optimum, except under very restrictive circumstances. In passing, we show that using consumer prices as a control variables-a standard procedure in tax-reform analysis-rather than the taxes themselves, leads to incorrect conclusions when not all taxes or prices can be controlled.
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Paper provided by UBC Department of Economics in its series UBC Departmental Archives with number
98-09.
Find related papers by JEL classification: D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
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