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Optimal indirect taxation with a restricted number of tax rates

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  • Pascal Belan

    (EUREQUA - Equipe Universitaire de Recherche en Economie Quantitative - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, LEN - Laboratoire d'économie de Nantes - IEMN-IAE Nantes - Institut d'Économie et de Management de Nantes - Institut d'Administration des Entreprises - Nantes - UN - Université de Nantes)

  • Stéphane Gauthier

    (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique, CREST-INSEE - Centre de Recherche en Economie et en Statistique - Institut national de la statistique et des études économiques (INSEE))

Abstract

This paper analyzes the optimal structure of indirect taxation when the number of available tax rates is smaller than the number of taxable commodities. Such a constraint requires to choose the levels of tax rates and the groups of commodities that will be taxed at equal rates (or exempted). In a partial equilibrium framework, with a single agent and a low amount of tax collection, it is shown that the process of allocation of commodities to groups depends on both price elasticities and consumption spendings. Still, the optimal tax structure displays a weak form of the inverse elasticity rule; consumption spendings influence the size of the fiscal base, and may lead to many tax exemptions.

Suggested Citation

  • Pascal Belan & Stéphane Gauthier, 2006. "Optimal indirect taxation with a restricted number of tax rates," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00106898, HAL.
    • Handle: RePEc:hal:cesptp:halshs-00106898
    DOI: 10.1016/j.jpubeco.2005.10.004
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00106898
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    References listed on IDEAS

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    1. Belan, Pascal & Gauthier, Stéphane & Laroque, Guy, 2008. "Optimal grouping of commodities for indirect taxation," Journal of Public Economics, Elsevier, vol. 92(7), pages 1738-1750, July.
    2. Gordon, James P. F., 1989. "Tax reform via commodity grouping," Journal of Public Economics, Elsevier, vol. 39(1), pages 67-81, June.
    3. Cornia, Gary C. & Edmiston, Kelly D. & Sheffrin, Steven M. & Sexton, Terri A., 2000. "An Analysis of the Feasibility of Implementing a Single Rate Sales Tax," National Tax Journal, National Tax Association, vol. 53(n. 4), pages 1327-50, December.
    4. Yitzhaki, Shlomo, 1979. "A Note on Optimal Taxation and Administrative Costs," American Economic Review, American Economic Association, vol. 69(3), pages 475-480, June.
    5. R. G. Lipsey & Kelvin Lancaster, 1956. "The General Theory of Second Best," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 24(1), pages 11-32.
    6. Mirrlees, J. A., 1976. "Optimal tax theory : A synthesis," Journal of Public Economics, Elsevier, vol. 6(4), pages 327-358, November.
    7. Cornia, Gary C. & Edmiston, Kelly D. & Sheffrin, Steven M. & Sexton, Terri A., 2000. "An Analysis of the Feasibility of Implementing a Single Rate Sales Tax," National Tax Journal, National Tax Association;National Tax Journal, vol. 53(4), pages 1327-1350, December.
    8. Angus Deaton, 1979. "The Distance Function in Consumer Behaviour with Applications to Index Numbers and Optimal Taxation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 46(3), pages 391-405.
    9. Slemrod, Joel, 1990. "Optimal Taxation and Optimal Tax Systems," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 157-178, Winter.
    10. 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.
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    Cited by:

    1. Belan, Pascal & Gauthier, Stéphane & Laroque, Guy, 2008. "Optimal grouping of commodities for indirect taxation," Journal of Public Economics, Elsevier, vol. 92(7), pages 1738-1750, July.
    2. Christian Gillitzer & Henrik Jacobsen Kleven & Joel Slemrod, 2017. "A Characteristics Approach to Optimal Taxation: Line Drawing and Tax‐Driven Product Innovation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 119(2), pages 240-267, April.
    3. Alain Babatounde & Bart Capeau & Romain Houssa, 2023. "Welfare effects of indirect tax policies in West Africa," DeFiPP Working Papers 2301, University of Namur, Development Finance and Public Policies.

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