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Consumption indivisibility and the optimal tax mix

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  • Lu, Chun-Hui
  • Ueng, K.L. Glen
  • Chang, Juin-Jen

Abstract

This paper reexamines optimal commodity and income taxation with consumption indivisibility. We show that, in the presence of indivisible-good consumption, the Atkinson-Stiglitz theorem on the uselessness of commodity taxation fails. Without a distortion on consumption, the optimal commodity tax on indivisible goods acts as a differential lump-sum tax to engage in income redistribution and achieve the social optimum. The optimal tax rate for a specific divisible good is higher (lower) if the divisible good and the indivisible good are substitutes (complements). Differential commodity taxation can always improve welfare under a simple linear income tax system.

Suggested Citation

  • Lu, Chun-Hui & Ueng, K.L. Glen & Chang, Juin-Jen, 2022. "Consumption indivisibility and the optimal tax mix," Economic Modelling, Elsevier, vol. 112(C).
    • Handle: RePEc:eee:ecmode:v:112:y:2022:i:c:s0264999322000918
    DOI: 10.1016/j.econmod.2022.105845
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    More about this item

    Keywords

    Consumption indivisibility; Optimal tax mix between commodity and income taxes;

    JEL classification:

    • D60 - Microeconomics - - Welfare Economics - - - General
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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