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Direct Versus Indirect Taxation: The Design of the Tax Structure Revisited

Direct Versus Indirect Taxation: The Design of the Tax Structure Revisited This article studies the optimal direct/indirect tax mix problem when individuals differ in several unobservable characteristics (productivity and endowments). It presents general expressions for the optimal commodity tax rates and proves that contrary to Atkinson and Stiglitz's (1976) result, differential commodity taxation remains a useful instrument of tax policy even if preferences are separable between labor and produced goods. When cross substitution effects are zero, the expressions resemble traditional many households Ramsey rules. In a Cobb–Douglas illustration, where endowments differ only in good 1 (interpreted as “wealth”), the tax on good 2 provides an indirect way to tax the unobservable wealth. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Economic Review Wiley

Direct Versus Indirect Taxation: The Design of the Tax Structure Revisited

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References (26)

Publisher
Wiley
Copyright
Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association
ISSN
0020-6598
eISSN
1468-2354
DOI
10.1111/1468-2354.00133
Publisher site
See Article on Publisher Site

Abstract

This article studies the optimal direct/indirect tax mix problem when individuals differ in several unobservable characteristics (productivity and endowments). It presents general expressions for the optimal commodity tax rates and proves that contrary to Atkinson and Stiglitz's (1976) result, differential commodity taxation remains a useful instrument of tax policy even if preferences are separable between labor and produced goods. When cross substitution effects are zero, the expressions resemble traditional many households Ramsey rules. In a Cobb–Douglas illustration, where endowments differ only in good 1 (interpreted as “wealth”), the tax on good 2 provides an indirect way to tax the unobservable wealth.

Journal

International Economic ReviewWiley

Published: Aug 1, 2001

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