Rules of Normalisation and their Importance for Interpretation of Systems of Optimal Taxation
The adoption of proper rules of normalisation is in general considered a trivial problem which deserves little attention. Possibly for that very reason errors in normalisation have resulted in flawed interpretations of the conditions for optimal commodity taxation. We state based on an explicit representation of the general equilibrium conditions the rules of normalisation in standard optimal tax models. This allows us to provide an intuitive explanation of what determines the optimal tax system. Finally, we review a number of examples where lack of precision with respect to normalisation in otherwise important contributions to the literature on optimal taxation has given rise to misinterpretations of of analytical results.
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