Optimal Mixed Taxation: Some Further Results

Abstract

Using the primal approach to study the optimal mix of direct and indirect taxes, new results are obtained for a wide class of utility functions. We found that: 1) Commodities should be taxed or subsidized according to whether their conditional labor elasticity of commodity demand is negative or positive; 2) Normal goods complementary with leisure in both the Marshallian and Hicksian sense should have positive tax rates; 3) The optimal use of linear commodity taxes increases optimal income tax rates, for a given desire to redistribute income; 4) Optimal income tax rates become everywhere non-negative and strictly positive at the endpoints. Not only these results corroborate the usefulness of commodity taxes in contrast to the recommendations of the Mirrlees review and other policy studies, but also suggest that real tax systems can be close to optimal tax systems.

Keywords: optimal mixed taxation; primal approach; complements to leisure

JEL Classification: C6-D6-D8-H2