Working Paper: NBER ID: w14397
Authors: Louis Kaplow
Abstract: Ever since Corlett and Hague (1953), it has been understood that it tends to be optimal on second-best grounds to (relatively) tax complements to leisure and subsidize substitutes because doing so helps to offset the distorting effect of taxation on labor supply. Yet in the context of simultaneous optimization of a nonlinear income tax and commodity taxes, Atkinson and Stiglitz (1976) claim to have demonstrated the opposite, that goods complementary with leisure should "face lower tax rates, whereas substitutes face higher tax rates." Derivations in leading texts on optimal taxation seem to yield opposing conclusions regarding the sign of optimal deviation of commodity taxes from uniformity. It is demonstrated that the optimality of relatively taxing leisure complements is indeed correct, and conflicting results are explained.
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 |
|---|---|
| Income Tax (H26) | Labor Supply (J20) |
| Tax on Leisure Complements (H29) | Labor Effort (J29) |
| Tax on Leisure Complements (H29) | Consumption of Leisure (E21) |
| Tax on Leisure Complements (H29) | First-order Efficiency Gain (D61) |
| Tax on Substitutes (H29) | Consumption of Substitutes (D11) |
| Tax on Leisure Complements (H29) | Utility Maximization (D11) |
| Tax on Leisure Complements (H29) | Social Welfare (I38) |
| Taxing Leisure Complements (H31) | Reduce Distortion from Income Tax (H31) |