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Rules of Normalisation and their Importance for Interpretation of Systems of Optimal Taxation

Author

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  • Knud Jørgen Munk

    (School of Economics and Management, University of Aarhus, Denmark)

Abstract

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.

Suggested Citation

  • Knud Jørgen Munk, 2006. "Rules of Normalisation and their Importance for Interpretation of Systems of Optimal Taxation," Economics Working Papers 2006-13, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:aarhec:2006-13
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    File URL: https://repec.econ.au.dk/repec/afn/wp/06/wp06_13.pdf
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    References listed on IDEAS

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    1. Francesco Busato & Enrico Marchetti, 2009. "Skills, sunspots and cycles," Journal of Economics, Springer, vol. 97(3), pages 189-215, July.
    2. Munch, Jakob Roland & Rosholm, Michael & Svarer, Michael, 2008. "Home ownership, job duration, and wages," Journal of Urban Economics, Elsevier, vol. 63(1), pages 130-145, January.
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    1. Mogens Fosgerau & Kurt Van Dender, 2013. "Road pricing with complications," Transportation, Springer, vol. 40(3), pages 479-503, May.
    2. Borger, Bruno De, 2011. "Optimal congestion taxes in a time allocation model," Transportation Research Part B: Methodological, Elsevier, vol. 45(1), pages 79-95, January.

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    More about this item

    Keywords

    Public economics; optimal taxation; normalisation rules; p-complements; q-complements; distance function;
    All these keywords.

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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