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Consumption taxes and taste heterogeneity

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  • Stéphane Gauthier

    () (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics)

  • Fanny Henriet

    () (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics)

Abstract

We study optimal commodity taxes in the presence of non-linear income taxes when agents differ in skills and tastes for consumption. We show that commodity taxes are partly determined by a many-person Ramsey rule when there is taste heterogeneity within income classes. The usual role of consumption taxes in relaxing incentive constraints explains the remaining part of these taxes when there is taste heterogeneity between income classes. We quantify the importance of these two components on Canadian microdata using a new method to identify empirically the binding incentive constraints. Incentives matter but tax exemptions are mostly justified by Ramsey considerations.

Suggested Citation

  • Stéphane Gauthier & Fanny Henriet, 2016. "Consumption taxes and taste heterogeneity," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01252563, HAL.
  • Handle: RePEc:hal:cesptp:halshs-01252563
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-01252563
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    Keywords

    taste heterogeneity; commodity taxes; income taxation; empirical tests for asymmetric information; social weights;

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