The Ramsey Rule at 100: Paring Back the Overgrowth
75 Pages Posted: 23 Sep 2021 Last revised: 13 Dec 2021
Date Written: September 23, 2021
In 1927 the mathematician Frank Ramsey published a paper on optimal taxation in which he put forward what has come to be known as the “Ramsey rule”. Nearly one hundred years later, Ramsey’s paper remains a go-to reference for normative tax theory in a number of fields, including legal scholarship. This paper reviews the reasoning behind the Ramsey rule and attempts to clear up various points of confusion that have grown up over decades of perfunctory citation. It explains in simple terms what the rule is and how it is derived. It then critically analyzes the rule’s most prevalent interpretations, arguing that these range from uninformative to misleading.
An online mathematical appendix is available at https://ssrn.com/abstract=3925626.
Keywords: Optimal taxation, Ramsey rule, inverse elasticity rule, distortion, deadweight loss, revenue externalities
JEL Classification: K34, H21
Suggested Citation: Suggested Citation