Taxing a Commodity With and Without Revenue Neutrality: An Exploration Using a Calibrated Theoretical Consumer Equilibrium Model

Frank T. Denton and Dean C. Mountain

Quantitative Studies in Economics and Population Research Reports from McMaster University

Abstract: It has long been recognized that taxing a commodity that generates negative externalities can be used to reduce the consumption of that commodity. A variant involves the imposition of revenue neutrality but that may alter the tax rate required to meet a consumption reduction target. We explore the relationships among the commodity tax rate, the demand and supply elasticities, and the revenue offsets by calibrating a theoretical consumer equilibrium model and then recalibrating it with alternative parameter configurations. For each configuration we simulate equilibrium for three policy scenarios: no neutrality, neutrality achieved by subsidizing other commodities, and neutrality achieved by income transfer.

Keywords: Consumer Market Equilibrium; Commodity Taxation; Revenue Neutrality (search for similar items in EconPapers)
JEL-codes: D11 D58 H23 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2011-05
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Persistent link: https://EconPapers.repec.org/RePEc:mcm:qseprr:445

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