Consumption indivisibility and the optimal tax mix

Chun-Hui Lu, K.L. Glen Ueng and Juin-Jen Chang

Economic Modelling, 2022, vol. 112, issue C

Abstract: This paper reexamines optimal commodity and income taxation with consumption indivisibility. We show that, in the presence of indivisible-good consumption, the Atkinson-Stiglitz theorem on the uselessness of commodity taxation fails. Without a distortion on consumption, the optimal commodity tax on indivisible goods acts as a differential lump-sum tax to engage in income redistribution and achieve the social optimum. The optimal tax rate for a specific divisible good is higher (lower) if the divisible good and the indivisible good are substitutes (complements). Differential commodity taxation can always improve welfare under a simple linear income tax system.

Keywords: Consumption indivisibility; Optimal tax mix between commodity and income taxes (search for similar items in EconPapers)
JEL-codes: D60 H21 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:112:y:2022:i:c:s0264999322000918

DOI: 10.1016/j.econmod.2022.105845

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