On the Undesirability of Commodity Taxation Even When Income Taxation is Not Optimal

20 Pages Posted: 19 Oct 2004

See all articles by Louis Kaplow

Louis Kaplow

Harvard Law School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: March 2004

Abstract

An important result due to Atkinson and Stiglitz (1976) is that differential commodity taxation is not optimal in the presence of an optimal nonlinear income tax (given weak separability of utility between labor and all consumption goods). This article demonstrates that their conclusion holds regardless of whether the income tax is optimal. In particular, given any commodity tax and income tax system, differential commodity taxation can be eliminated in a manner that results in a Pareto improvement. Also, differential commodity taxation can be proportionally reduced so as to generate a Pareto improvement. In addition, for commodity tax reforms that do not eliminate or proportionally reduce differential taxation, a simple efficiency condition is offered for determining whether a Pareto improvement is possible.

JEL Classification: H21, H24

Suggested Citation

Kaplow, Louis, On the Undesirability of Commodity Taxation Even When Income Taxation is Not Optimal (March 2004). Harvard Law and Economics Discussion Paper No. 470. Available at SSRN: https://ssrn.com/abstract=607365 or http://dx.doi.org/10.2139/ssrn.607365

Louis Kaplow (Contact Author)

Harvard Law School ( email )

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National Bureau of Economic Research (NBER)

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