Taxing Intermediate Goods to Compensate for Distorting Taxes on Household Consumption

Lars Bohlin ()
Additional contact information
Lars Bohlin: Department of Business, Economics, Statistics and Informatics, Postal: Örebro University, Swedish Business School, SE - 701 82 ÖREBRO, Sweden

No 2010:5, Working Papers from Örebro University, School of Business

Abstract: In contrast to the classic result in Diamond and Mirrlees (1971) that fiscal taxes should not be levied on intermediate use of goods, Newbury (1985) showed that, in a closed economy with Leontief technology, input taxes should be used to indirectly tax commodities that for some reason are untaxed in final consumption.

This paper extends the Newbury result to more general cases; i.e., to open economies with substitution possibilities in the production functions. Moreover, it shows that the welfare maximizing proportion between the tax rate for intermediate use by firms and final demand by households declines with higher elasticities of substitution in production functions and with higher price elasticities in import demand functions and export supply functions. It also shows that the welfare maximizing proportion of tax rates between households and firms for one commodity will depend upon the corresponding proportion of tax rates for important substitutes for that commodity. These results are shown both in stylized Computable General Equilibrium (CGE) models and in an applied CGE model of the Swedish economy where the tax on electricity is used as an example.

Keywords: Optimal taxation; CGE-analysis (search for similar items in EconPapers)
JEL-codes: D58 H21 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2010-09-21
New Economics Papers: this item is included in nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.oru.se/globalassets/oru-sv/institution ... rs2010/wp-5-2010.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hhs:oruesi:2010_005

Access Statistics for this paper

More papers in Working Papers from Örebro University, School of Business Örebro University School of Business, SE - 701 82 ÖREBRO, Sweden. Contact information at EDIRC.
Bibliographic data for series maintained by ().