Ramsey Strikes Back: Optimal Commodity Taxes and Redistribution in the Presence of Salience Effects

10 Pages Posted: 22 Jan 2018 Last revised: 20 Mar 2021

See all articles by Hunt Allcott

Hunt Allcott

New York University (NYU)

Benjamin B Lockwood

University of Pennsylvania - The Wharton School

Dmitry Taubinsky

Harvard University

Date Written: January 2018

Abstract

An influential result in modern optimal tax theory, the Atkinson and Stiglitz (1976) theorem, holds that for a broad class of utility functions, all redistribution should be carried out through labor income taxation, rather than differential taxes on commodities or capital. An important requirement for that result is that commodity taxes are known and fully salient when consumers make income-determining choices. This paper allows for the possibility consumers may be inattentive to (or unaware of) some commodity taxes when making choices about income. We show that commodity taxes are useful for redistribution in this setting. In fact, the optimal commodity taxes essentially follow the classic “many person Ramsey rule” (Diamond 1975), scaled by the degree of inattention. As a result, to the extent that commodity taxes are not (fully) salient, goods should be taxed when they are less elastically consumed, and when they are consumed primarily by richer consumers. We extend this result to the setting of corrective taxes, and show how nonsalient corrective taxes should be adjusted for distributional reasons.

Suggested Citation

Allcott, Hunt and Lockwood, Benjamin B and Taubinsky, Dmitry, Ramsey Strikes Back: Optimal Commodity Taxes and Redistribution in the Presence of Salience Effects (January 2018). NBER Working Paper No. w24233, Available at SSRN: https://ssrn.com/abstract=3106674

Hunt Allcott (Contact Author)

New York University (NYU) ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

Benjamin B Lockwood

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Dmitry Taubinsky

Harvard University ( email )

Cambridge, MA
United States

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