The John M. Olin Center

Paper Abstract

470. Louis Kaplow, On the Undesirability of Commodity Taxation Even When Income Taxation Is Not Optimal, 03/2004; subsequently published in Journal of Public Economics, Vol. 90, 2006, 1235-1250.

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 weakseparability 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 amanner 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 taxreforms that do not eliminate or proportionally reduce differential taxation, a simple efficiency condition is offered for determining whether a Pareto improvement is possible.

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