Working Paper: NBER ID: w10407
Authors: Louis Kaplow
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.
Keywords: No keywords provided
JEL Codes: H21; H24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| differential commodity taxation (H25) | Pareto improvements (D61) |
| elimination of differential commodity taxation (H29) | Pareto improvements (D61) |
| differential commodity taxation can be proportionally reduced (H23) | Pareto improvement (D61) |
| optimal nonlinear income tax (H21) | differential commodity taxation is not optimal (H21) |