A characteristics approach to optimal taxation: line drawing and tax-driven product innovation

Christian Gillitzer, Henrik Jacobsen Kleven and Joel Slemrod

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Real-world tax legislation assigns goods to different categories of tax rates on the basis of observable characteristics, allowing the tax system to handle a constantly evolving set of available goods. We recast the theory of optimal taxation in the language of characteristics, and we show how to optimally draw lines that delineate tax-rate regimes. Such lines are associated with notches in tax liability as a function of characteristics, creating incentives to introduce goods with new combinations of characteristics in order to reduce tax liability. With a restricted set of tax instruments, such notches are in general part of the second-best optimal tax system.

Keywords: tax design; notches (search for similar items in EconPapers)
JEL-codes: H21 (search for similar items in EconPapers)
Date: 2017-03-01
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Citations: View citations in EconPapers (5)

Published in Scandinavian Journal of Economics, 1, March, 2017, 119(2), pp. 240-267. ISSN: 0347-0520

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http://eprints.lse.ac.uk/69821/ Open access version. (application/pdf)

Related works:
Journal Article: A Characteristics Approach to Optimal Taxation: Line Drawing and Tax‐Driven Product Innovation (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:69821

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