A literature review on optimal indirect taxation and the uniformity debate

Abstract

A review of the theoretical literature on optimal indirect taxation reveals that analytical arguments in favor of uniform indirect taxation seem rather weak and unrealistic; hence determining the optimal tax structure remains an empirical issue. However, reviewing the empirical-computational studies published so far, shows that most of them operate under rather restrictive and simplistic frameworks. There is little computational support for uniformity, particularly when the models approach real world complexity. It appears that in a many-consumer economy, differentiated and progressive indirect taxation is likely to be the optimal solution.