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Is Commodity Taxation Unfair?

In a model where agents have unequal skills and heterogeneous preferences about consumption goods and leisure, this paper studies how to combine linear commodity taxes and non-linear income tax. It proposes a particular social welfare function on the basis of fairness principles. It then derives a simple criterion for evaluating the social welfare consequences of various tax schedules. Under the proposed approach, the optimal tax should have no commodity tax for some range of consumptions, and income redistribution would feature high subsidies to the working poor. It is also shown that, even when the income tax fails to be optimal, commodity taxes may not improve social welfare.

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Paper provided by Institut d'economie publique (IDEP), Marseille, France in its series IDEP Working Papers with number 0502.

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Length: 30 pages
Date of creation: Jan 2005
Date of revision: Jan 2005
Handle: RePEc:iep:wpidep:0502
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  1. Christiansen, Vidar, 1981. "Evaluation of Public Projects under Optimal Taxation," Review of Economic Studies, Wiley Blackwell, vol. 48(3), pages 447-57, July.
  2. Marc Fleurbaey & Fran�Ois Maniquet, 2007. "Help the Low Skilled or Let the Hardworking Thrive? A Study of Fairness in Optimal Income Taxation," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 9(3), pages 467-500, 06.
  3. 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.
  4. Sören Blomquist & Vidar Christiansen, 2008. "Taxation and Heterogeneous Preferences," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 64(2), pages 218-244, June.
  5. Maniquet, Francois & Sprumont, Yves, 2005. "Welfare egalitarianism in non-rival environments," Journal of Economic Theory, Elsevier, vol. 120(2), pages 155-174, February.
  6. Robin Boadway & Maurice Marchand & Pierre Pestieau, 1992. "Towards a Theory of the Direct-Indirect Tax Mix," Working Papers 853, Queen's University, Department of Economics.
  7. MANIQUET, François & SPRUMONT, Yves, 2002. "Fair Production and Allocation of an Excludable Nonrival Good," Cahiers de recherche 2002-04, Universite de Montreal, Departement de sciences economiques.
  8. 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.
  9. Fleurbaey, Marc & Suzumura, Kotaro & Tadenuma, Koichi, 2002. "Arrovian Aggregation in Economic Environments: How Much Should We Know About Indifference Surfaces?," Discussion Paper 121, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
  10. Decoster, Andre & Schokkaert, Erik & Van Camp, Guy, 1997. "Is redistribution through indirect taxes equitable?," European Economic Review, Elsevier, vol. 41(3-5), pages 599-608, April.
  11. 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.
  12. Cécile Boyer & Christian Gourieroux & Gaëlle Le Fol, 2001. "Ajustement des prix bid et ask en présence d'information privée," Working Papers 2001-25, Centre de Recherche en Economie et Statistique.
  13. Armstrong, Mark, 1996. "Multiproduct Nonlinear Pricing," Econometrica, Econometric Society, vol. 64(1), pages 51-75, January.
  14. Jean-Charles Rochet & Philippe Chone, 1998. "Ironing, Sweeping, and Multidimensional Screening," Econometrica, Econometric Society, vol. 66(4), pages 783-826, July.
  15. BOADWAY, R. & MARCHAND, M. & PESTIEAU, P. & del MAR RACIONERO, M., 2001. "Optimal redistribution with heterogeneous preferences for leisure," CORE Discussion Papers 2001025, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  16. Guesnerie, Roger, 1977. "On the direction of tax reform," Journal of Public Economics, Elsevier, vol. 7(2), pages 179-202, April.
  17. Marc Fleurbaey, 2003. "Social Welfare, Priority to the Worst-Off And the Dimensions of Individual Well-Being," IDEP Working Papers 0312, Institut d'economie publique (IDEP), Marseille, France.
  18. 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).
  19. Marc Fleurbaey & Fran�ois Maniquet, 2006. "Fair Income Tax," Review of Economic Studies, Oxford University Press, vol. 73(1), pages 55-83.
  20. Alkan, Ahmet & Demange, Gabrielle & Gale, David, 1991. "Fair Allocation of Indivisible Goods and Criteria of Justice," Econometrica, Econometric Society, vol. 59(4), pages 1023-39, July.
  21. Feldstein, Martin, 1976. "On the theory of tax reform," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 77-104.
  22. 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.
  23. Robin Boadway & Michael Keen, 1991. "Public Goods, Self-Selection and Optimal Income Taxation," Working Papers 828, Queen's University, Department of Economics.
  24. Nishimura, Yukihiro, 2003. "Optimal non-linear income taxation for reduction of envy," Journal of Public Economics, Elsevier, vol. 87(2), pages 363-386, February.
  25. Samuelson, P. A., 1986. "Theory of optimal taxation," Journal of Public Economics, Elsevier, vol. 30(2), pages 137-143, July.
  26. Cécile Boyer & Christian Gourieroux & Gaëlle Le Fol, 2001. "Ajustement des prix bid et ask en présence d'information privée," Working Papers 2001-25, Centre de Recherche en Economie et Statistique.
  27. Hatta, Tatsuo, 1977. "A Theory of Piecemeal Policy Recommendations," Review of Economic Studies, Wiley Blackwell, vol. 44(1), pages 1-21, February.
  28. M. Fleurbaey & F. Maniquet, 2008. "Fair social orderings," Economic Theory, Springer, vol. 34(1), pages 25-45, January.
  29. Christiansen, Vidar, 1984. "Which commodity taxes should supplement the income tax?," Journal of Public Economics, Elsevier, vol. 24(2), pages 195-220, July.
  30. Konishi, Hideo, 1995. "A Pareto-improving commodity tax reform under a smooth nonlinear income tax," Journal of Public Economics, Elsevier, vol. 56(3), pages 413-446, March.
  31. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  32. Yukihiro Nishimura, 2003. "Optimal commodity taxation for reduction of envy," Social Choice and Welfare, Springer, vol. 21(3), pages 501-527, December.
  33. Cremer, Helmuth & Gahvari, Firouz, 1995. "Uncertainty and optimal taxation: In defense of commodity taxes," Journal of Public Economics, Elsevier, vol. 56(2), pages 291-310, February.
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