Optimal Commodity Taxation in the Presence of Income Taxes: A Note
This paper examines the optimal commodity tax rate structure in a single-person economy in which income taxes are imposed on different factor incomes at different rates. It is shown that in such an economy, the optimal commodity tax rate is higher for the first commodity if (i) it is the weaker substitute for the composite factor; and (ii) it is the weaker substitute for the factor with the higher income tax rate relative to the other factor. Conditions (i) and (ii), respectively, ensure that this taxation represses the incentive towards over-consumption of (i) all factors and (ii) the factor with the higher income tax rate.
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Volume (Year): 54 (1999)
Issue (Month): 1-2 ()
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