NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Louis Kaplow

NBER Working Paper No. 10407
Issued in April 2004
NBER Program(s):   PE

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.

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Document Object Identifier (DOI): 10.3386/w10407

Published: 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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