Taxing Leisure Complements
Ever since Corlett and Hague (1953), it has been understood that it tends to be optimal on second-best grounds to (relatively) tax complements to leisure and subsidize substitutes because doing so helps to offset the distorting effect of taxation on labor supply. Yet in the context of simultaneous optimization of a nonlinear income tax and commodity taxes, Atkinson and Stiglitz (1976) claim to have demonstrated the opposite, that goods complementary with leisure should "face lower tax rates, whereas substitutes face higher tax rates." Derivations in leading texts on optimal taxation seem to yield opposing conclusions regarding the sign of optimal deviation of commodity taxes from uniformity. It is demonstrated that the optimality of relatively taxing leisure complements is indeed correct, and conflicting results are explained.
|Date of creation:||Oct 2008|
|Publication status:||published as TAXING LEISURE COMPLEMENTS LOUIS KAPLOW† Article first published online: 5 AUG 2010 DOI: 10.1111/j.1465-7295.2009.00230.x © 2009 Western Economic Association International Issue Economic Inquiry Economic Inquiry Volume 48, Issue 4, pages 1065–1071, October 2010|
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