Direct versus indirect taxation: the design of the tax structure revisited
This article studies the optimal direct/indirect tax mix problem when individuals differ in several unobservable characteristics (productivity and endowments). It presents general expressions for the optimal commodity tax rates and proves that contrary to Atkinson and Stiglitz's (1976) result, differential commodity taxation remains a useful instrument of tax policy even if preferences are separable between labor and produced goods. When cross substitution effects are zero, the expressions resemble traditional many households Ramsey rules. In a Cobb-Douglas illustration, where endowments differ only in good 1 (interpreted as "wealth"), the tax on good 2 provides an indirect way to tax the unobservable wealth.
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|Note:||In : International Economic Review, 42(3), 781-799, 2001|
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- A. B. Atkinson, 1977.
"Optimal Taxation and the Direct versus Indirect Tax Controversy,"
Canadian Journal of Economics,
Canadian Economics Association, vol. 10(4), pages 590-606, November.
- Anthony B. Atkinson, 1976. "Optimal Taxation and the Direct versus Indirect Tax Controversy," Working Papers 247, Queen's University, Department of Economics.
- J. A. Mirrlees, 1976.
"Optimal Tax Theory: A Synthesis,"
176, Massachusetts Institute of Technology (MIT), Department of Economics.
- Joseph E. Stiglitz, 1987.
"Pareto Efficient and Optimal Taxation and the New New Welfare Economics,"
NBER Working Papers
2189, National Bureau of Economic Research, Inc.
- Stiglitz, Joseph E., 1987. "Pareto efficient and optimal taxation and the new new welfare economics," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 2, chapter 15, pages 991-1042 Elsevier.
- 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.
- Cremer, Helmuth & Gahvari, Firouz, 1995. "Uncertainty, Optimal Taxation and the Direct versus Indirect Tax Controversy," Economic Journal, Royal Economic Society, vol. 105(432), pages 1165-1179, September.
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