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Using distance functions to understand interest taxation

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  • John Burbidge

Abstract

One of Terence Gorman's insights was that if one wants to derive rules about optimal commodity tax rates (or prices) one should treat quantities consumed as the instruments. This paper builds on Angus Deaton's development of this idea using distance functions. I identify necessary and sufficient conditions for uniform commodity taxation in a static model and the efficiency of various tax structures in a life‐cycle model. One implication is that the optimal interest tax rate may be higher when ordinary or compensated labour supply elasticities are lower. Utiliser des fonctions de distance pour comprendre la fiscalité sur les intérêts. Une des idées de Terence Gorman était que si on veut dériver des règles à propos du taux d'imposition optimal sur des biens, on devrait considérer les quantités consommées comme des instruments. Ce texte construit sur le développement qu'Angus Deaton a proposé de cette idée en utilisant des fonctions de distance. L'auteur identifie les conditions nécessaires et suffisantes pour une imposition uniforme des biens dans un modèle statique, et l'efficacité de diverses structures d'imposition dans un modèle de cycle de vie. On montre aussi que le taux d'imposition optimal sur les intérêts peut être plus élevé quand les élasticités de l'offre de travail (ordinaire ou compensé) sont plus faibles.

Suggested Citation

  • John Burbidge, 2015. "Using distance functions to understand interest taxation," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 48(3), pages 903-923, August.
  • Handle: RePEc:wly:canjec:v:48:y:2015:i:3:p:903-923
    DOI: 10.1111/caje.12162
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    References listed on IDEAS

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    1. John Burbidge, 2018. "Using distance functions to derive optimal progressive earnings tax and commodity tax structures," Working Papers 1808, University of Waterloo, Department of Economics, revised 12 Nov 2018.

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