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The Optimal Taxation Theory Revisited: The Case of Inverse Demands

Author

Listed:
  • Hoanjae Park

    (Catholic University of Daegu)

  • Kun-Ha Hwang

    (Catholic University of Daegu)

Abstract

This paper reformulates the optimal commodity taxation theory which is based on the distance function. It enables the change in the marginal rate of substitution between goods to be broken into scale effects and substitution effects in quantity space. An inverse demand system with these effects is constructed as a first attempt in the literature, extending Deaton's idea to the directly estimable inverse demand system. In addition, the dependence of theoretical results of the optimal taxes on the specification of market behaviors is examined following Fullerton. It suggests that reform of optimal taxation be influenced by the choice of market condition, which specifies either traditional demand systems or inverse demand systems.

Suggested Citation

  • Hoanjae Park & Kun-Ha Hwang, 2000. "The Optimal Taxation Theory Revisited: The Case of Inverse Demands," Korean Economic Review, Korean Economic Association, vol. 16, pages 431-450.
    • Handle: RePEc:kea:keappr:ker-200012-16-2-13
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    More about this item

    Keywords

    Optimal Taxation; Inverse Demand; Tax Reform; Marginal Welfare Cost;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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