 Welfare Effects of Tax and Price Changes and the CES-UT Utility FunctionEconomics Working Papers from Department of Economics and Business Economics, Aarhus University Abstract: Dixit’s 1975 paper "Welfare Effects of Tax and Price Changes" constitutes a seminal contribution to the theory of tax reform within a second-best general equilibrium framework. The present paper clarifies ambiguities with respect to normalisation which has led to misinterpretation of some of Dixit’s analytical results. It proves that a marginal tax reform starting from a proportional tax system will improve social welfare if it increases the supply of labour, whatever the rule of normalisation adopted. In models which impose additive separability between consumption and leisure in household preferences this insight cannot be articulated. This paper proposes as an alternative a parameterised utility function with explicit representation of the use of time, the CES-UT, which allows a flexible representation of the relationship between consumption and leisure. It also demonstrates how standard compensated price elasticities can be derived from the parameters of the CES-UT and how it may be used for applied tax reform analysis. Keywords: Public economics; optimal taxation; tax reform; tax simulation; CGE models (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:aah:aarhec:2006-15 Access Statistics for this paper More papers in Economics Working Papers from Department of Economics and Business Economics, Aarhus University |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.