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Uncertainty and Optimally Uniform Commodity Taxes

Author

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  • Helmuth Cremer
  • Firouz Gahvari

Abstract

This paper examines the implications of uncertainty for the structure of optimal commodity taxes in the presence of a linear income tax. Consumers face uncertain income and commit to consumption of some goods before the resolution of uncertainty and to others after. Preferences are separable between labor and consumption goods. We prove that optimal commodity taxes are (i) uniform within the category of noncommitted goods if their subutility is logarithmic; (ii) uniform within the two categories if both subutilities are logarithmic; and (iii) nonzero across categories, with the tax rate on precommitted goods being lower than the tax rate on noncommitted goods.

Suggested Citation

  • Helmuth Cremer & Firouz Gahvari, 1999. "Uncertainty and Optimally Uniform Commodity Taxes," Southern Economic Journal, Southern Economic Association, vol. 66(1), pages 156-167, July.
  • Handle: RePEc:sej:ancoec:v:66:1:y:1999:p:156-167
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