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Consumption taxation for redistribution

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  • Burbidge, John

    (School of Economics, University of Waterloo)

Abstract

This paper explores the optimal behaviour of a government intent on redistributing from the top to the bottom of the earnings distribution, whose tax-transfer instruments are weaker than those assumed by Mirrlees (1971) but stronger than those assumed by Sheshinski (1972). I prove that one may obtain fi rst-order welfare gains by switching from Sheshinski's linear progressive tax-transfer system to one based on consumption taxation. In addition, I show the Atkinson-Stiglitz Theorem rests on unrestricted nonlinear earnings taxation. In an optimal progressive earnings and consumption tax-transfer system the Corlett-Hague understanding of the Ramsey tax problem - tax goods more complementary with leisure, holding utility constant, at higher rates, even if leisure is additively separable from goods - plays an important role. As redistribution proceeds this force is counterbalanced by the Mirrleesian result that taxing the work effort of lower wage types is an efficient way to cope with incentive compatibility constraints.

Suggested Citation

  • Burbidge, John, 2026. "Consumption taxation for redistribution," Working Papers 26007, University of Waterloo, Department of Economics.
    • Handle: RePEc:wat:wpaper:26007
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    File URL: https://hdl.handle.net/10012/23581
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    References listed on IDEAS

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    1. W. J. Corlett & D. C. Hague, 1953. "Complementarity and the Excess Burden of Taxation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 21(1), pages 21-30.
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    8. repec:adr:anecst:y:2014:i:113-114:p:9 is not listed on IDEAS
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    Cited by:

    1. Burbidge, John, 2026. "Taxation for redistribution: Optimal tax structures along the utility possibility frontier," Working Papers 26003, University of Waterloo, Department of Economics.

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