On the Undesirability of Commodity Taxation Even When Income Taxation is Not Optimal

Louis Kaplow

No 10407, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: An important result due to Atkinson and Stiglitz (1976) is that differential commodity taxation is not optimal in the presence of an optimal nonlinear income tax (given weak separability of utility between labor and all consumption goods). This article demonstrates that their conclusion holds regardless of whether the income tax is optimal. In particular, given any commodity tax and income tax system, differential commodity taxation can be eliminated in a manner that results in a Pareto improvement. Also, differential commodity taxation can be proportionally reduced so as to generate a Pareto improvement. In addition, for commodity tax reforms that do not eliminate or proportionally reduce differential taxation, a simple efficiency condition is offered for determining whether a Pareto improvement is possible.

JEL-codes: H21 H24 (search for similar items in EconPapers)
Date: 2004-04
Note: PE
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Citations: View citations in EconPapers (6)

Published as Kaplow, Louis. "On The Undesirability Of Commodity Taxation Even When Income Taxation Is Not Optimal," Journal of Public Economics, 2006, v90(6-7,Aug), 1235-1250.

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Journal Article: On the undesirability of commodity taxation even when income taxation is not optimal (2006)
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