12 Pages Posted: 10 Oct 2008
Date Written: October 2008
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.
JEL Classification: H21, H24
Suggested Citation: Suggested Citation
Kaplow, Louis, Taxing Leisure Complements (October 2008). NBER Working Paper No. W14397. Available at SSRN: https://ssrn.com/abstract=1281889