IDEAS home Printed from https://ideas.repec.org/p/ces/ceswps/_4142.html
   My bibliography  Save this paper

Optimal Linear Commodity Taxation under Optimal Non-Linear Income Taxation

Author

Listed:
  • Bas Jacobs
  • Robin Boadway

Abstract

This paper analyzes optimal linear commodity taxes joint with non-linear income taxes. We provide optimal tax rules based on empirically observable elasticities. We demonstrate that commodities should be taxed/subsidized if doing so boosts labor supply. The critical role of commodity taxation is to alleviate distortions on labor supply caused by income taxation. In addition, we extend the standard formula for optimal non-linear income taxation for the presence of optimal linear commodity taxes. We correct parts of the literature that suggest that the optimal tax rules for commodity taxes derived by Atkinson and Stiglitz (1976, 1980) apply as well to linear tax commodity taxes. We show that the optimal second-best allocation cannot be implemented with linear commodity taxes and non-linear income taxes.

Suggested Citation

  • Bas Jacobs & Robin Boadway, 2013. "Optimal Linear Commodity Taxation under Optimal Non-Linear Income Taxation," CESifo Working Paper Series 4142, CESifo.
    • Handle: RePEc:ces:ceswps:_4142
    as

    Download full text from publisher

    File URL: https://www.cesifo.org/DocDL/cesifo1_wp4142.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Gordon, Roger H. & Kopczuk, Wojciech, 2014. "The choice of the personal income tax base," Journal of Public Economics, Elsevier, vol. 118(C), pages 97-110.
    2. Kaplow, Louis, 2006. "On the undesirability of commodity taxation even when income taxation is not optimal," Journal of Public Economics, Elsevier, vol. 90(6-7), pages 1235-1250, August.
    3. Seade, J. K., 1977. "On the shape of optimal tax schedules," Journal of Public Economics, Elsevier, vol. 7(2), pages 203-235, April.
    4. Browning, Martin & Meghir, Costas, 1991. "The Effects of Male and Female Labor Supply on Commodity Demands," Econometrica, Econometric Society, vol. 59(4), pages 925-951, July.
    5. Diamond, P. A., 1975. "A many-person Ramsey tax rule," Journal of Public Economics, Elsevier, vol. 4(4), pages 335-342, November.
    6. Salanié, Bernard, 2011. "The Economics of Taxation," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262016346, April.
    7. Myles,Gareth D., 1995. "Public Economics," Cambridge Books, Cambridge University Press, number 9780521497695, September.
    8. A. B. Atkinson, 1977. "Optimal Taxation and the Direct versus Indirect Tax Controversy," Canadian Journal of Economics, Canadian Economics Association, vol. 10(4), pages 590-606, November.
    9. Tuomala, Matti, 1984. "On the optimal income taxation : Some further numerical results," Journal of Public Economics, Elsevier, vol. 23(3), pages 351-366, April.
    10. (IFS), Institute for Fiscal Studies (ed.), 2010. "Dimensions of Tax Design: The Mirrlees Review," OUP Catalogue, Oxford University Press, number 9780199553754.
    11. W. J. Corlett & D. C. Hague, 1953. "Complementarity and the Excess Burden of Taxation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 21(1), pages 21-30.
    12. Laroque, Guy R., 2005. "Indirect taxation is superfluous under separability and taste homogeneity: a simple proof," Economics Letters, Elsevier, vol. 87(1), pages 141-144, April.
    13. Jukka Pirttilä & Ilpo Suoniemi, 2014. "Public Provision, Commodity Demand, and Hours of Work: An Empirical Analysis," Scandinavian Journal of Economics, Wiley Blackwell, vol. 116(4), pages 1044-1067, October.
    14. Nava, Mario & Schroyen, Fred & Marchand, Maurice, 1996. "Optimal fiscal and public expenditure policy in a two-class economy," Journal of Public Economics, Elsevier, vol. 61(1), pages 119-137, July.
    15. Emmanuel Saez, 2001. "Using Elasticities to Derive Optimal Income Tax Rates," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 68(1), pages 205-229.
    16. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 55-75.
    17. Jacobs, Bas & Boadway, Robin, 2014. "Optimal linear commodity taxation under optimal non-linear income taxation," Journal of Public Economics, Elsevier, vol. 117(C), pages 201-210.
    18. Stiglitz, Joseph E., 1982. "Self-selection and Pareto efficient taxation," Journal of Public Economics, Elsevier, vol. 17(2), pages 213-240, March.
    19. Christiansen, Vidar, 1984. "Which commodity taxes should supplement the income tax?," Journal of Public Economics, Elsevier, vol. 24(2), pages 195-220, July.
    20. Emmanuel Farhi & Iván Werning, 2012. "Capital Taxation: Quantitative Explorations of the Inverse Euler Equation," Journal of Political Economy, University of Chicago Press, vol. 120(3), pages 000.
    21. Diamond, Peter A, 1998. "Optimal Income Taxation: An Example with a U-Shaped Pattern of Optimal Marginal Tax Rates," American Economic Review, American Economic Association, vol. 88(1), pages 83-95, March.
    22. Mirrlees, J. A., 1976. "Optimal tax theory : A synthesis," Journal of Public Economics, Elsevier, vol. 6(4), pages 327-358, November.
    23. Saez, Emmanuel, 2002. "The desirability of commodity taxation under non-linear income taxation and heterogeneous tastes," Journal of Public Economics, Elsevier, vol. 83(2), pages 217-230, February.
    24. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 38(2), pages 175-208.
    25. Laurence Jacquet & Etienne Lehmann & Bruno van Der Linden, 2013. "The Optimal Marginal Tax Rates with both Extensive and Intensive Responses," Post-Print hal-02979440, HAL.
    26. Nava, M. & Schroyen, F. & Marchand, M., 1996. "Optimal fiscal and public expenditure policy in a two-class economy," LIDAM Reprints CORE 1231, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    27. Efraim Sadka, 1976. "On Income Distribution, Incentive Effects and Optimal Income Taxation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 43(2), pages 261-267.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jacobs, Bas & de Mooij, Ruud A., 2015. "Pigou meets Mirrlees: On the irrelevance of tax distortions for the second-best Pigouvian tax," Journal of Environmental Economics and Management, Elsevier, vol. 71(C), pages 90-108.
    2. Xavier Ruiz del Portal, 2020. "Two reasons for not using commodity taxation in the presence of an optimal income tax," Hacienda Pública Española / Review of Public Economics, IEF, vol. 232(1), pages 9-28, March.
    3. John T. Revesz, 2014. "A Numerical Model of Optimal Differentiated Indirect Taxation," Hacienda Pública Española / Review of Public Economics, IEF, vol. 211(4), pages 9-66, December.
    4. Odd E. Nygård & John T. Revesz, 2015. "Optimal indirect taxation and the uniformity debate: A review of theoretical results and empirical contributions," Discussion Papers 809, Statistics Norway, Research Department.
    5. Boadway,Robin & Cuff,Katherine, 2022. "Tax Policy," Cambridge Books, Cambridge University Press, number 9781108949453, September.
    6. Lu, Chun-Hui & Ueng, K.L. Glen & Chang, Juin-Jen, 2022. "Consumption indivisibility and the optimal tax mix," Economic Modelling, Elsevier, vol. 112(C).
    7. Felix Bierbrauer, 2016. "Effizienz oder Gerechtigkeit? Ungleiche Einkommen, ungleiche Vermögen und die Theorie der optimalen Besteuerung," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2016_03, Max Planck Institute for Research on Collective Goods.
    8. Robin Boadway & Katherine Cuff, 2023. "The Case for Uniform Commodity Taxation: A Tax Reform Approach," Hacienda Pública Española / Review of Public Economics, IEF, vol. 244(1), pages 79-109, March.
    9. Stiglitz, Joseph E., 2018. "Pareto efficient taxation and expenditures: Pre- and re-distribution," Journal of Public Economics, Elsevier, vol. 162(C), pages 101-119.
    10. Bierbrauer Felix J., 2016. "Effizienz oder Gerechtigkeit?: Ungleiche Einkommen, ungleiche Vermögen und Optimale Steuern," Perspektiven der Wirtschaftspolitik, De Gruyter, vol. 17(1), pages 2-24, April.
    11. Bas (B.) Jacobs & Rick (F.) van der Ploeg, 2017. "Should Pollution Taxes Be Targeted At Income Redistribution?," Tinbergen Institute Discussion Papers 17-070/VI, Tinbergen Institute.
    12. Jacobs, Bas & van der Ploeg, Frederick, 2019. "Redistribution and pollution taxes with non-linear Engel curves," Journal of Environmental Economics and Management, Elsevier, vol. 95(C), pages 198-226.
    13. X. Ruiz del Portal, 2017. "Optimal mixed taxation, public goods and the problem of high-skilled emigration," Journal of Economics, Springer, vol. 122(2), pages 97-119, October.
    14. Odd E. Nygard & John T. Revesz, 2016. "A literature review on optimal indirect taxation and the uniformity debate," Hacienda Pública Española / Review of Public Economics, IEF, vol. 218(3), pages 107-140, September.
    15. John T. Revesz, 2014. "A computational model of optimal commodity taxation," Public Finance Research Papers 4, Istituto di Economia e Finanza, DSGE, Sapienza University of Rome.
    16. Peter Diamond & Emmanuel Saez, 2011. "The Case for a Progressive Tax: From Basic Research to Policy Recommendations," Journal of Economic Perspectives, American Economic Association, vol. 25(4), pages 165-190, Fall.
    17. Boadway, Robin & Song, Zhen, 2016. "Indirect taxes for redistribution: Should necessity goods be favored?," Research in Economics, Elsevier, vol. 70(1), pages 64-88.
    18. Antoine Ferey & Benjamin B. Lockwood & Dmitry Taubinsky, 2024. "Sufficient Statistics for Nonlinear Tax Systems with General Across-Income Heterogeneity," American Economic Review, American Economic Association, vol. 114(10), pages 3206-3249, October.
    19. Bas Jacobs, 2010. "The Marginal Cost of Public Funds is One," CESifo Working Paper Series 3250, CESifo.
    20. Tomer Blumkin & Yoram Margalioth & Efraim Sadka, 2010. "Taxing Children: The Re-distributive Role of Child Benefits - Revisited," CESifo Working Paper Series 2970, CESifo.

    More about this item

    Keywords

    Atkinson-Stiglitz Theorem; optimal non-linear income taxation; optimal linear and non-linear indirect taxation;
    All these keywords.

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_4142. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Klaus Wohlrabe (email available below). General contact details of provider: https://edirc.repec.org/data/cesifde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.