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Production Efficiency and the Direct-Indirect Tax Mix

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  • Charles Blackorby
  • Craig Brett

Abstract

In the design of the optimal direct/indirect tax mix, the canonical view was laid by Atkinson and Stiglitz (1976) who showed that commodity taxes are unnecessary in an economy in which there is an optimal nonlinear income tax provided that commodities are separable from labor in the utility functions of all taxpayers, that the aggregators over these commodities are ordinally equivalent and that wages are fixed. When wages are endogenous, Naito (1999) showed that this result may not hold and in addition that production efficiency may not be Pareto optimal. Given an optimal nonlinear income tax, we show that production inefficiency is Pareto optimal if the aggregate technology set is strictly concave. The Atkinson-Stiglitz condition is neither necessary nor sufficient for zero commodity taxation and commodity taxes are part of almost all Pareto optima. Copyright 2004 Blackwell Publishing Inc..

Suggested Citation

  • Charles Blackorby & Craig Brett, 2004. "Production Efficiency and the Direct-Indirect Tax Mix," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 6(1), pages 165-180, February.
  • Handle: RePEc:bla:jpbect:v:6:y:2004:i:1:p:165-180
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    Cited by:

    1. Sebastian G. Kessing & Chiara Strozzi, 2017. "The regional distribution of public employment: theory and evidence," Regional Studies, Taylor & Francis Journals, vol. 51(7), pages 1100-1114, July.
    2. Stéphane Gauthier & Guy Laroque, 2017. "Production Efficiency and Profit Taxation," PSE Working Papers halshs-01622337, HAL.
    3. Darío Maldonado, 2008. "Education policies and optimal taxation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 15(2), pages 131-143, April.
    4. Alan Krause, 2012. "Optimal Savings Taxation when Individuals have Different CRRA Utility Functions," Discussion Papers 12/13, Department of Economics, University of York.
    5. Thomas Gaube, 2005. "Public Investment and Income Taxation: Redistribution vs. Productive Performance," Journal of Economics, Springer, vol. 86(1), pages 1-18, October.
    6. Craig Brett & John A. Weymark, 2009. "Comparative Statics of Optimal Nonlinear Income Taxation in the Presence of a Publicly Provided Input," Vanderbilt University Department of Economics Working Papers 0910, Vanderbilt University Department of Economics.
    7. Firouz Gahvari, 2014. "Second-Best Taxation of Incomes and Non-Labor Inputs in a Model with Endogenous Wages," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 16(6), pages 917-935, December.
    8. Hisahiro Naito, 2016. "Optimal Shadow Prices for the Public Sector in the Presence of a Non-linear Income Tax System in an Open Economy," Tsukuba Economics Working Papers 2016-003, Economics, Graduate School of Humanities and Social Sciences, University of Tsukuba.

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