A computational model of optimal commodity taxation
This report examines the structure of optimal commodity tax rates in a many-person many-goods static computational model using segmented LES utility. One of the major findings is that with non-linear Engel curves and linear income tax, optimal commodity tax rates tend to be progressive and highly dispersed under logarithmic utility specifications. However, the dispersion of tax rates is considerably reduced if the inequality aversion of society is low or if tax evasion depends among other things on disparities between commodity tax rates. With exogenously given non-optimal and non-linear income tax schedules, usually there is still a need for differentiated and progressive commodity taxation. Tax evasion tends to reduce optimal tax rates for necessities but increases them for luxuries. Private compliance costs and government administration costs reduce optimal tax rates by a similar amount to the share of these costs from taxes. The results indicate that in a redistributive model the effect of externalities on optimal tax rates exceeds the corresponding Pigovian tax rates or subsidies. The main benefit of higher taxes on leisure complements than leisure substitutes appears to relate to increased tax revenue for redistribution rather than improvement in the utility position of those paying the taxes. The effect of complexities such as tax evasion, administrative costs, externalities and leisure complements/substitutes on redistribution is not neutral. Generally, these complexities tend to increase the progressivity of optimal commodity tax rates. Explanations are provided why the numerical results presented here do not contradict the Laroque-Kaplow proposition, which advocates uniform commodity taxation. Some practical application problems and logical weaknesses of the Laroque-Kaplow proposition are noted.
|Date of creation:||May 2014|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +39 06 49910392
Fax: +39 06 49910648
Web page: http://www.digef.uniroma1.it/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Murty, M. N. & Ray, Ranjan, 1987. "Sensitivity of optimal commodity taxes to relaxing leisure/goods separability and to the wage rate," Economics Letters, Elsevier, vol. 24(3), pages 273-277.
- Diamond, P. A., 1975.
"A many-person Ramsey tax rule,"
Journal of Public Economics,
Elsevier, vol. 4(4), pages 335-342, November.
- 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.
- Guy Laroque, 2004.
"Indirect Taxation is Superfluous under Separability and Taste Homogeneity : A Simple Proof,"
2004-23, Centre de Recherche en Economie et Statistique.
- Laroque, Guy R., 2005. "Indirect taxation is superfluous under separability and taste homogeneity: a simple proof," Economics Letters, Elsevier, vol. 87(1), pages 141-144, April.
- CREMER, Helmuth & PESTIEAU , Pierre & ROCHET, Jean-Charles, .
"Direct versus indirect taxation: the design of the tax structure revisited,"
CORE Discussion Papers RP
-1528, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Cremer, Helmuth & Pestieau, Pierre & Rochet, Jean-Charles, 2001. "Direct versus Indirect Taxation: The Design of the Tax Structure Revisted," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(3), pages 781-99, August.
- CREMER, Helmuth & PESTIEAU, Pierre & ROCHET, Jean-Charles, 1999. "Direct versus indirect taxation: the design of the tax structure revisited," CORE Discussion Papers 1999010, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Emmanuel Saez, 2000.
"The Desirability of Commodity Taxation under Non-Linear Income Taxation and Heterogeneous Tastes,"
NBER Working Papers
8029, National Bureau of Economic Research, Inc.
- Saez, Emmanuel, 2002. "The desirability of commodity taxation under non-linear income taxation and heterogeneous tastes," Journal of Public Economics, Elsevier, vol. 83(2), pages 217-230, February.
- Saez, Emmanuel, 2001.
"Using Elasticities to Derive Optimal Income Tax Rates,"
Review of Economic Studies,
Wiley Blackwell, vol. 68(1), pages 205-29, January.
- Emmanuel Saez, 2000. "Using Elasticities to Derive Optimal Income Tax Rates," NBER Working Papers 7628, National Bureau of Economic Research, Inc.
- Revesz, John T, 1986. "On Some Advantages of Progressive Indirect Taxation," Public Finance = Finances publiques, , vol. 41(2), pages 182-99.
- Kaplow, Louis, 2006.
"On the undesirability of commodity taxation even when income taxation is not optimal,"
Journal of Public Economics,
Elsevier, vol. 90(6-7), pages 1235-1250, August.
- Louis Kaplow, 2004. "On the Undesirability of Commodity Taxation Even When Income Taxation is Not Optimal," NBER Working Papers 10407, National Bureau of Economic Research, Inc.
- Cremer, Helmuth & Gahvari, Firouz, 1995. "Uncertainty, Optimal Taxation and the Direct versus Indirect Tax Controversy," Economic Journal, Royal Economic Society, vol. 105(432), pages 1165-79, September.
- Naito, Hisahiro, 1999. "Re-examination of uniform commodity taxes under a non-linear income tax system and its implication for production efficiency," Journal of Public Economics, Elsevier, vol. 71(2), pages 165-188, February.
- Bastani, Spencer & Blomquist, Sören & Pirttilä, Jukka, 2013.
"How Should Commodities Be Taxed? A Counterargument to the Recommendation in the Mirrlees Review,"
Working Paper Series, Center for Fiscal Studies
2013:5, Uppsala University, Department of Economics.
- Spencer Bastani & Sören Blomquist & Jukka Pirttilä, 2013. "How Should Commodities be Taxed? A Counterargument to the Recommendation in the Mirrlees Review," CESifo Working Paper Series 4240, CESifo Group Munich.
- Feldstein, Martin S, 1972. "Distributional Equity and the Optimal Structure of Public Prices," American Economic Review, American Economic Association, vol. 62(1), pages 32-36, March.
- repec:cup:cbooks:9780521497695 is not listed on IDEAS
- Deaton, Angus & Stern, Nicholas, 1986. "Optimally uniform commodity taxes, taste differences and lump-sum grants," Economics Letters, Elsevier, vol. 20(3), pages 263-266.
- Joseph E. Stiglitz, 1981.
"Self-Selection and Pareto Efficient Taxation,"
NBER Working Papers
0632, National Bureau of Economic Research, Inc.
- Alm, James, 1996. "What Is an "Optimal'"Tax System?," National Tax Journal, National Tax Association, vol. 49(1), pages 117-33, March.
- Ebrahimi, Ahmad & Heady, Christopher, 1987. "Tax Design and Household Composition," Economic Journal, Royal Economic Society, vol. 98(390), pages 83-96, Supplemen.
- Revesz, John T, 1997. "Uniform versus Non-uniform Indirect Taxation: Some Numerical Results," Public Finance = Finances publiques, , vol. 52(2), pages 210-34.
- By Louis Kaplow, 2012. "Optimal Control Of Externalities In The Presence Of Income Taxation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(2), pages 487-509, 05.
- Cooter, Robert D, 1978. "Optimal Tax Schedules and Rates: Mirrlees and Ramsey," American Economic Review, American Economic Association, vol. 68(5), pages 756-68, December.
When requesting a correction, please mention this item's handle: RePEc:gfe:pfrp00:0004. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Valeria De Bonis)
If references are entirely missing, you can add them using this form.