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Is Commodity Taxation Unfair?

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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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File URL: http://www.idep-fr.org/IMG/document/dt/dt0502.pdf
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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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  13. Alkan, Ahmet & Demange, Gabrielle & Gale, David, 1991. "Fair Allocation of Indivisible Goods and Criteria of Justice," Econometrica, Econometric Society, vol. 59(4), pages 1023-1039, July.
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  16. 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.
  17. Robin Boadway & Maurice Marchand & Pierre Pestieau & María del Mar Racionero, 2002. "Optimal Redistribution with Heterogeneous Preferences for Leisure," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 4(4), pages 475-498, October.
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  25. Nishimura, Yukihiro, 2003. "Optimal non-linear income taxation for reduction of envy," Journal of Public Economics, Elsevier, vol. 87(2), pages 363-386, February.
  26. 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.
  27. François Maniquet & Yves Sprumont, 2004. "Fair Production and Allocation of an Excludable Nonrival Good," Econometrica, Econometric Society, vol. 72(2), pages 627-640, 03.
  28. 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.
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