Working Paper: NBER ID: w8833
Authors: Emmanuel Saez
Abstract: Optimal tax theory has shown that, under weak assumptions, indirect taxation such as production subsidies, tariffs, or differentiated commodity taxation, are sub-optimal and that redistribution should be achieved solely with the direct income tax. However, these important results of optimal tax theory, namely production efficiency and uniform commodity taxation under non-linear income taxation, have been shown to break down when labor taxation is based on income only and when there is imperfect substitution of labor types in the production function. These results in favor of indirect tax instruments are valid in the short-run when skills are exogenous and individuals cannot move from occupation to occupation. In the long-run, it is more realistic to assume that individuals choose their occupation based on the relative after-tax rewards. This paper shows that, in that context, production efficiency and the uniform commodity tax result are restored. Therefore, in a long-run context, direct income taxation should be preferred to indirect tax instruments to raise revenue and achieve redistribution.
Keywords: No keywords provided
JEL Codes: H21; H23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| indirect taxes (H29) | redistribution (H23) |
| short-run tax policies (H32) | labor market behaviors (J29) |
| long-run occupational choices (J29) | direct income taxation (H24) |
| tax policies (H29) | welfare (I38) |
| indirect tax instruments (H29) | redistribution in short run (D39) |
| labor taxation (J89) | breakdown of optimal tax theory (H21) |