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The Ramsey Rule Reconsidered

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  • Randall G. Holcombe

    (Florida State University)

Abstract

The Ramsey rule for optimal excise taxation suggests that goods should be taxed in inverse proportion to their elasticities of demand. This analysis shows that when the political process that determines tax rates is taken into account, the Ramsey rule may not be superior to a fiscal constitution that specifies that all goods are taxed at the same rate. The information necessary to set taxes in conformance with the Ramsey rule is not directly observable, which will lead to rent-seeking activities as interest groups try to influence the political determination of tax rates they face. Furthermore, incentives in the political process work against setting taxes according to the Ramsey rule. Building on Buchanan’s work on optimal taxation and the nature of the fiscal constitution, the Ramsey rule should be reconsidered as a guide to optimal excise tax policy.

Suggested Citation

  • Randall G. Holcombe, 2002. "The Ramsey Rule Reconsidered," Public Finance Review, , vol. 30(6), pages 562-578, November.
  • Handle: RePEc:sae:pubfin:v:30:y:2002:i:6:p:562-578
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    Cited by:

    1. Gerda Dewit & Dermot Leahy, 2015. "Tax Uniformity: A Commitment Device for Restraining Opportunistic Behavior," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 17(5), pages 641-672, October.
    2. Mailu, S.K. & Mulinge, W., 2016. "Excise tax changes and their impact on Gadam sorghum demand in Kenya," 2016 AAAE Fifth International Conference, September 23-26, 2016, Addis Ababa, Ethiopia 246959, African Association of Agricultural Economists (AAAE).

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