Working Paper: NBER ID: w24233
Authors: Hunt Allcott; Benjamin Lockwood; Dmitry Taubinsky
Abstract: An influential result in modern optimal tax theory, the Atkinson and Stiglitz (1976) theorem, holds that for a broad class of utility functions, all redistribution should be carried out through labor income taxation, rather than differential taxes on commodities or capital. An important requirement for that result is that commodity taxes are known and fully salient when consumers make income-determining choices. This paper allows for the possibility consumers may be inattentive to (or unaware of) some commodity taxes when making choices about income. We show that commodity taxes are useful for redistribution in this setting. In fact, the optimal commodity taxes essentially follow the classic “many person Ramsey rule” (Diamond 1975), scaled by the degree of inattention. As a result, to the extent that commodity taxes are not (fully) salient, goods should be taxed when they are less elastically consumed, and when they are consumed primarily by richer consumers. We extend this result to the setting of corrective taxes, and show how nonsalient corrective taxes should be adjusted for distributional reasons.
Keywords: Optimal Taxation; Commodity Taxes; Salience Effects; Redistribution
JEL Codes: H21; H23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Inattention to commodity taxes (H29) | Optimal commodity tax rates (H21) |
| Inattention to commodity taxes (H29) | Redistributive purpose of commodity taxes (H23) |
| Optimal commodity tax rates (H21) | Ramsey rule (H21) |
| Inattention to commodity taxes (H29) | Effectiveness of commodity taxes for redistribution (H23) |
| Salience of goods taxed (H29) | Corrective taxes (H23) |
| Commodity taxes (H25) | Behavioral insights in taxation (H26) |