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Optimal indirect taxation with a restricted number of tax rates

  • Belan, Pascal
  • Gauthier, Stephane

This paper analyzes the optimal structure of indirect taxation when the number of available tax rates is smaller than the number of taxable commodities. Such a constraint requires to choose the levels of tax rates and the groups of commodities that will be taxed at equal rates (or exempted). In a partial equilibrium framework, with a single agent and a low amount of tax collection, it is shown that the process of allocation of commodities to groups depends on both price elasticities and consumption spendings. Still, the optimal tax structure displays a weak form of the inverse elasticity rule; consumption spendings influence the size of the fiscal base, and may lead to many tax exemptions.

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File URL: http://www.sciencedirect.com/science/article/B6V76-4J6WP1D-1/2/32bbab7beacb7c04b4dc23d8a74beffb
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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 90 (2006)
Issue (Month): 6-7 (August)
Pages: 1201-1213

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Handle: RePEc:eee:pubeco:v:90:y:2006:i:6-7:p:1201-1213
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505578

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  1. J. A. Mirrlees, 1976. "Optimal Tax Theory: A Synthesis," Working papers 176, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. 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.
  3. Pascal Belan & Stéphane Gauthier & Guy Laroque, 2005. "The Optimal Grouping of Commodities for Indirect Taxation," Working Papers 2005-15, Centre de Recherche en Economie et Statistique.
  4. Yitzhaki, Shlomo, 1979. "A Note on Optimal Taxation and Administrative Costs," American Economic Review, American Economic Association, vol. 69(3), pages 475-80, June.
  5. Joel Slemrod, 1989. "Optimal Taxation and Optimal Tax Systems," NBER Working Papers 3038, National Bureau of Economic Research, Inc.
  6. Gordon, James P. F., 1989. "Tax reform via commodity grouping," Journal of Public Economics, Elsevier, vol. 39(1), pages 67-81, June.
  7. Cornia, Gary C. & Edmiston, Kelly D. & Sheffrin, Steven M. & Sexton, Terri A., 2000. "An Analysis of the Feasibility of Implementing a Single Rate Sales Tax," National Tax Journal, National Tax Association, vol. 53(n. 4), pages 1327-50, December.
  8. Deaton, Angus, 1979. "The Distance Function in Consumer Behaviour with Applications to Index Numbers and Optimal Taxation," Review of Economic Studies, Wiley Blackwell, vol. 46(3), pages 391-405, July.
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