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Optimal indirect taxation with a restricted number of tax rates

  • Pascal Belan


    (LEN - Laboratoire d'Economie de Nantes - UN - Université de Nantes, EUREQUA - Equipe Universitaire de Recherche en Economie Quantitative - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

  • Stéphane Gauthier


    (CREM - Centre de Recherche en Economie et Management - CNRS - Centre National de la Recherche Scientifique - Université de Caen Basse-Normandie - UR1 - Université de Rennes 1, CREST-INSEE - Centre de Recherche en Economie et en Statistique - Institut national de la statistique et des études économiques (INSEE))

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.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00106898.

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Date of creation: Aug 2006
Date of revision:
Publication status: Published in Journal of Public Economics, Elsevier, 2006, 90 (6-7), pp.1201-1213. <10.1016/j.jpubeco.2005.10.004>
Handle: RePEc:hal:cesptp:halshs-00106898
DOI: 10.1016/j.jpubeco.2005.10.004
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  1. Joel Slemrod, 1989. "Optimal Taxation and Optimal Tax Systems," NBER Working Papers 3038, National Bureau of Economic Research, Inc.
  2. Pascal Belan & Stéphane Gauthier & Guy Laroque, 2005. "The Optimal Grouping of Commodities for Indirect Taxation," Working Papers 2005-15, Centre de Recherche en Economie et Statistique.
  3. Mirrlees, J. A., 1976. "Optimal tax theory : A synthesis," Journal of Public Economics, Elsevier, vol. 6(4), pages 327-358, November.
  4. Gordon, James P. F., 1989. "Tax reform via commodity grouping," Journal of Public Economics, Elsevier, vol. 39(1), pages 67-81, June.
  5. Angus Deaton, 1979. "The Distance Function in Consumer Behaviour with Applications to Index Numbers and Optimal Taxation," Review of Economic Studies, Oxford University Press, vol. 46(3), pages 391-405.
  6. 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.
  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, vol. 53(n. 4), pages 1327-50, December.
  8. Yitzhaki, Shlomo, 1979. "A Note on Optimal Taxation and Administrative Costs," American Economic Review, American Economic Association, vol. 69(3), pages 475-80, June.
  9. R. G. Lipsey & Kelvin Lancaster, 1956. "The General Theory of Second Best," Review of Economic Studies, Oxford University Press, vol. 24(1), pages 11-32.
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