Optimal Linear Commodity Taxation Under Optimal Non-Linear Income Taxation

31 Pages Posted: 8 Mar 2013

See all articles by Bas Jacobs

Bas Jacobs

Erasmus University Rotterdam (EUR); Tinbergen Institute; CESifo (Center for Economic Studies and Ifo Institute)

Robin Boadway

Queen's University; CESifo (Center for Economic Studies and Ifo Institute); Centre Interuniversitaire sur le Risque, les Politiques Economiques et l'Emploi (CIRPEE)

Date Written: February 28, 2013

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.

Keywords: Atkinson-Stiglitz Theorem, optimal non-linear income taxation, optimal linear and non-linear indirect taxation

JEL Classification: H200

Suggested Citation

Jacobs, Bas and Boadway, Robin, Optimal Linear Commodity Taxation Under Optimal Non-Linear Income Taxation (February 28, 2013). CESifo Working Paper Series No. 4142, Available at SSRN: https://ssrn.com/abstract=2228638 or http://dx.doi.org/10.2139/ssrn.2228638

Bas Jacobs (Contact Author)

Erasmus University Rotterdam (EUR) ( email )

PO Box 1738
Rotterdam, Zuid-Holland 3000 DR
Netherlands
+314081452 (Phone)

HOME PAGE: http://personal.eur.nl/bjacobs

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Robin Boadway

Queen's University ( email )

99 University Avenue
Kingston K7L 3N6, Ontario
Canada
613-533-2266 (Phone)
613-533-6668 (Fax)

HOME PAGE: http://qed.econ.queensu.ca/pub/faculty/boadway/

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre Interuniversitaire sur le Risque, les Politiques Economiques et l'Emploi (CIRPEE)

Ste-Foy, Quebec G1K 7P4
Canada

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