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Ramsey Strikes Back: Optimal Commodity Taxes and Redistribution in the Presence of Salience Effects

Author

Listed:
  • 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.

Suggested Citation

  • Hunt Allcott & Benjamin Lockwood & Dmitry Taubinsky, 2018. "Ramsey Strikes Back: Optimal Commodity Taxes and Redistribution in the Presence of Salience Effects," NBER Working Papers 24233, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:24233
    Note: LE PE
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    Cited by:

    1. Kory Kroft & Jean-William Laliberté & René Leal-Vizcaíno & Matthew J Notowidigdo, 2024. "Salience and Taxation with Imperfect Competition," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 91(1), pages 403-437.
    2. Benjamin B. Lockwood & Afras Sial & Matthew Weinzierl, 2021. "Designing, Not Checking, for Policy Robustness: An Example with Optimal Taxation," Tax Policy and the Economy, University of Chicago Press, vol. 35(1), pages 1-54.
    3. Benjamin B. Lockwood & Afras Sial & Matthew Weinzierl, 2021. "Designing, Not Checking, for Policy Robustness: An Example with Optimal Taxation," Tax Policy and the Economy, University of Chicago Press, vol. 35(1), pages 1-54.
    4. Sandro Ambuehl & B. Douglas Bernheim & Annamaria Lusardi, 2022. "Evaluating Deliberative Competence: A Simple Method with an Application to Financial Choice," American Economic Review, American Economic Association, vol. 112(11), pages 3584-3626, November.
    5. 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.
    6. Hunt Allcott & Benjamin B Lockwood & Dmitry Taubinsky, 2019. "Regressive Sin Taxes, with an Application to the Optimal Soda Tax," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 134(3), pages 1557-1626.
    7. Julio López Laborda & Carmen Marín González & Jorge Onrubia, 2018. "Tipo reducido, superreducido y exenciones en el IVA: una estimación de sus efectos recaudatorios y distributivos a partir de las encuestas de hogares," Studies on the Spanish Economy eee2018-23, FEDEA.

    More about this item

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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