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Is commodity taxation unfair?

  • Fleurbaey, Marc

In a model where agents have unequal skills and heterogeneous preferences about consumption goods and leisure, this paper studies how to combine linear commodity taxes and non-linear income tax. It proposes a particular social welfare function on the basis of fairness principles. It then derives a simple criterion for evaluating the social welfare consequences of various tax schedules. Under the proposed approach, the optimal tax should have no commodity tax for some range of consumptions, and income redistribution would feature high subsidies to the working poor. It is also shown that, even when the income tax fails to be optimal, commodity taxes may not improve social welfare.

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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 90 (2006)
Issue (Month): 10-11 (November)
Pages: 1765-1787

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Handle: RePEc:eee:pubeco:v:90:y:2006:i:10-11:p:1765-1787
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  1. Cremer, Helmuth & Pestieau, Pierre & Rochet, Jean-Charles, 2001. "Direct versus Indirect Taxation: The Design of the Tax Structure Revisted," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(3), pages 781-99, August.
  2. Cremer, Helmuth & Gahvari, Firouz, 1995. "Uncertainty and optimal taxation: In defense of commodity taxes," Journal of Public Economics, Elsevier, vol. 56(2), pages 291-310, February.
  3. Blomquist, Sören & Christiansen, Vidar, 2004. "Taxation and Heterogeneous Preferences," Working Paper Series 2004:9, Uppsala University, Department of Economics.
  4. Boadway, R. & Marchand, M. & Pestieau, P., . "Towards a theory of the direct-indirect tax mix," CORE Discussion Papers RP 1110, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Laroque, Guy R., 2005. "Indirect taxation is superfluous under separability and taste homogeneity: a simple proof," Economics Letters, Elsevier, vol. 87(1), pages 141-144, April.
  6. Yukihiro Nishimura, 2003. "Optimal commodity taxation for reduction of envy," Social Choice and Welfare, Springer, vol. 21(3), pages 501-527, December.
  7. 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.
  8. François Maniquet & Yves Sprumont, 2004. "Fair Production and Allocation of an Excludable Nonrival Good," Econometrica, Econometric Society, vol. 72(2), pages 627-640, 03.
  9. Samuelson, P. A., 1986. "Theory of optimal taxation," Journal of Public Economics, Elsevier, vol. 30(2), pages 137-143, July.
  10. repec:oup:restud:v:38:y:1971:i:114:p:175-208 is not listed on IDEAS
  11. Fleurbaey, Marc & Suzumura, Kotaro & Tadenuma, Koichi, 2002. "Arrovian Aggregation in Economic Environments: How Much Should We Know About Indifference Surfaces?," Discussion Paper 121, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
  12. Cécile Boyer & Christian Gourieroux & Gaëlle Le Fol, 2001. "Ajustement des prix bid et ask en présence d'information privée," Working Papers 2001-25, Centre de Recherche en Economie et Statistique.
  13. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
  14. Guesnerie Roger, 1976. "On the direction of tax reform," CEPREMAP Working Papers (Couverture Orange) 7603, CEPREMAP.
  15. BOADWAY, R. & MARCHAND, M. & PESTIEAU, P. & del MAR RACIONERO, M., 2001. "Optimal redistribution with heterogeneous preferences for leisure," CORE Discussion Papers 2001025, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  16. Nishimura, Yukihiro, 2003. "Optimal non-linear income taxation for reduction of envy," Journal of Public Economics, Elsevier, vol. 87(2), pages 363-386, February.
  17. Maniquet, Francois & Sprumont, Yves, 2005. "Welfare egalitarianism in non-rival environments," Journal of Economic Theory, Elsevier, vol. 120(2), pages 155-174, February.
  18. Emmanuel Saez, 2000. "The Desirability of Commodity Taxation under Non-Linear Income Taxation and Heterogeneous Tastes," NBER Working Papers 8029, National Bureau of Economic Research, Inc.
  19. Marc Fleurbaey & Francois Maniquet, 2002. "Fair Income Tax," Economics Working Papers 0021, Institute for Advanced Study, School of Social Science.
  20. Christiansen, Vidar, 1984. "Which commodity taxes should supplement the income tax?," Journal of Public Economics, Elsevier, vol. 24(2), pages 195-220, July.
  21. Robin Boadway & Michael Keen, 1991. "Public Goods, Self-Selection and Optimal Income Taxation," Working Papers 828, Queen's University, Department of Economics.
  22. Marc Fleurbaey & Fran�Ois Maniquet, 2007. "Help the Low Skilled or Let the Hardworking Thrive? A Study of Fairness in Optimal Income Taxation," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 9(3), pages 467-500, 06.
  23. Armstrong, Mark, 1996. "Multiproduct Nonlinear Pricing," Econometrica, Econometric Society, vol. 64(1), pages 51-75, January.
  24. Naito, Hisahiro, 1999. "Re-examination of uniform commodity taxes under a non-linear income tax system and its implication for production efficiency," Journal of Public Economics, Elsevier, vol. 71(2), pages 165-188, February.
  25. repec:oup:restud:v:48:y:1981:i:3:p:447-57 is not listed on IDEAS
  26. Jean-Charles Rochet & Philippe Chone, 1998. "Ironing, Sweeping, and Multidimensional Screening," Econometrica, Econometric Society, vol. 66(4), pages 783-826, July.
  27. M. Fleurbaey & F. Maniquet, 2008. "Fair social orderings," Economic Theory, Springer, vol. 34(1), pages 25-45, January.
  28. Alkan, Ahmet & Demange, Gabrielle & Gale, David, 1991. "Fair Allocation of Indivisible Goods and Criteria of Justice," Econometrica, Econometric Society, vol. 59(4), pages 1023-39, July.
  29. Decoster, Andre & Schokkaert, Erik & Van Camp, Guy, 1997. "Is redistribution through indirect taxes equitable?," European Economic Review, Elsevier, vol. 41(3-5), pages 599-608, April.
  30. Feldstein, Martin, 1976. "On the theory of tax reform," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 77-104.
  31. Marc Fleurbaey, 2003. "Social Welfare, Priority to the Worst-Off And the Dimensions of Individual Well-Being," IDEP Working Papers 0312, Institut d'economie publique (IDEP), Marseille, France.
  32. repec:oup:restud:v:44:y:1977:i:1:p:1-21 is not listed on IDEAS
  33. Konishi, Hideo, 1995. "A Pareto-improving commodity tax reform under a smooth nonlinear income tax," Journal of Public Economics, Elsevier, vol. 56(3), pages 413-446, March.
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