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Optimal tax mix with merit goods

  • DEL MAR RACIONERO, Maria

This paper deals with optimal taxation in a two-class economy with two private commodities and labour. We derive optimal nonlinear income and linear commodity taxes in the presence of merit goods. We formulate merit good arguments via a pathology of individual choice. We assume weak separability between consumption and leisure and show that the standard optimal tax results are modified due to merit good considerations. We first find a subsidy on the merit good. Secondly, optimal income marginal tax rates are also shown to dioeer from the standard literature: it is positive on high-ability individuals and on low-ability individuals it is ambiguous because of a dampening eoeect due to merit good considerations. Finally, we derive the effective marginal tax rates

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers RP with number -1530.

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Handle: RePEc:cor:louvrp:-1530
Note: In : Oxford Economic Papers, 53, 628-641, 2001
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  1. J. A. Mirrlees, 1976. "Optimal Tax Theory: A Synthesis," Working papers 176, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 55-75.
  3. Neary, J.P & Roberts, K.W.S, 1978. "The Theory of Household Behaviour under Rationing," The Warwick Economics Research Paper Series (TWERPS) 132, University of Warwick, Department of Economics.
  4. Sandmo, Agnar, 1983. "Ex Post Welfare Economics and the Theory of Merit Goods," Economica, London School of Economics and Political Science, vol. 50(197), pages 19-33, February.
  5. Mirrless, J. A., 1975. "Optimal commodity taxation in a two-class economy," Journal of Public Economics, Elsevier, vol. 4(1), pages 27-33, February.
  6. Christiansen, Vidar, 1984. "Which commodity taxes should supplement the income tax?," Journal of Public Economics, Elsevier, vol. 24(2), pages 195-220, July.
  7. Pazner, Elisha A, 1972. "Merit Wants and the Theory of Taxation," Public Finance = Finances publiques, , vol. 27(4), pages 460-72.
  8. Besley, Timothy, 1988. "A simple model for merit good arguments," Journal of Public Economics, Elsevier, vol. 35(3), pages 371-383, April.
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