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Taxing a Commodity With and Without Revenue Neutrality: An Exploration Using a Calibrated Theoretical Consumer Equilibrium Model

  • Frank T. Denton
  • Dean C. Mountain
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    It has long been recognized that taxing a commodity that generates negative externalities can be used to reduce the consumption of that commodity. A variant involves the imposition of revenue neutrality but that may alter the tax rate required to meet a consumption reduction target. We explore the relationships among the commodity tax rate, the demand and supply elasticities, and the revenue offsets by calibrating a theoretical consumer equilibrium model and then recalibrating it with alternative parameter configurations. For each configuration we simulate equilibrium for three policy scenarios: no neutrality, neutrality achieved by subsidizing other commodities, and neutrality achieved by income transfer.

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    Paper provided by McMaster University in its series Quantitative Studies in Economics and Population Research Reports with number 445.

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    Length: 24 pages
    Date of creation: May 2011
    Date of revision:
    Handle: RePEc:mcm:qseprr:445
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    1. Véronique Nichèle & Jean-Marc Robin, 1995. "Simulation of indirect tax reforms using pooled micro and macro French data," Post-Print hal-00359428, HAL.
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