The theory of optimal taxation: what is the policy relevance?

Sørensen, Peter Birch

doi:10.1007/s10797-007-9024-1

Cited by 51 publications

(27 citation statements)

References 41 publications

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“…In this context, literature searches which tax rates, single rate or varying, will create optimal results in the construction of optimal commodity taxes. Within this scope, while on one side, there is the view arguing that a single rate tax will not damage market forces and will be synonymous with a fixed rate tax on income [14]; on the other side, optimal commodity taxes within the context of Ramsey and varying rates take place.…”

Section: Optimal Commodity Taxes: Ramsey Rulementioning

confidence: 99%

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Optimal Taxation of Consumption in the Scope of Changing

Aytaç¹

2018

Taxes and Taxation Trends

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Optimal taxation is the taxation that reflects society's choices between the rival goals of equality and economic efficiency, the starting point of which is to maximize social welfare. The optimal taxation of commodity that was launched by Ramsey is based on the rule of inverse elasticity, which holds that the taxation of goods with low elasticities of demand at a higher rate will reduce the loss of efficiency. The criticism of this rule is due to the fact that essential goods to meet basic needs have low price elasticity of demand, while luxury goods have high price elasticity. Under the assumption that consumers are similar, it is argued that the taxation of luxury goods at a lower rate than necessity goods will have a negative effect on tax justice. Changing market conditions thus change the elasticity of demand for luxury goods and necessity goods, and such change makes it necessary to reconsider the basic assumptions of optimal taxation and the criticisms directed at optimal taxation. In this context, the present study will investigate differing elasticities of demand in connection with changing market conditions in the scope of the liberalization of trade. In the light of these investigations, optimal commodity taxes will be reassessed.

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Section: Optimal Commodity Taxes: Ramsey Rulementioning

confidence: 99%

“…Elasticity of substitution between goods and leisure lies behind the fact that single rate tax, which does not change the relative prices of goods and will not be different from the lumpsum tax that will be imposed on labor income, is not optimal [14]. …”

Section: Optimal Commodity Taxes: Ramsey Rulementioning

confidence: 99%

Optimal Taxation of Consumption in the Scope of Changing

Aytaç¹

2018

Taxes and Taxation Trends

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“…In a recent contribution, Peter Sørensen (2007) capitals. The ratio of this theoretical position directly recalls results from the tradition of optimal taxation: if different forms of employment of capital, or different production sectors to invest into, present a differentiated tax base elasticity, it seems reasonable given the exogenous taxation revenue objective of the policy-maker, to burden more the less mobile capitals, and to burden with lighter taxes (and aligned with average tax rates applied internationally 20 ) highly mobile capitals.…”

Section: Tax Discrimination Based On Tax Evasionmentioning

confidence: 99%

Optimal Capital Income Taxation with Tax Evasion

d’Andria

2010

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may LUISS Guido Carli University of RomeAbstract The paper discusses the applicability of optimal taxation theory to sourcebased capital incomes when significant tax evasion is observed. Without tax evasion a modified Ramsey Rule may reduce distortions brought by international capital mobility, leading to levying differentiated tax rates in domestic sectors inversely proportioned to observed elasticities in terms of capital mobility. The introduction of tax evasion brings additional complexity. The viability of optimal tax rates à la Ramsey is explored, and additional requirement (namely that tax evasion is either very low or very homogeneous) are shown to be necessary in order to allow policy-makers to obtain the tax rates minimizing total excess burden. Results are also provided to solve the optimal taxation objective when tax evasion is a relevant phenomenon and is not homogeneous throughout domestic sectors. JEL H21, H26

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“…This is one of the great advantages of incorporating the representation of household consumption in the utility function. The optimal solution to the household maximisation problem in terms of ( ) 0 1 , ,.., N u x x x thus remains the same whether it is formulated as (37) or (38) As has been stated in Munk (2001), the suggestion by Kleven, Richter and Sørensen (2000), quoted by Boadway and Gahvari (2006) and Sørensen (2007), that household consumption provides a counter example to the Diamond and Mirrlees Production Efficiency Theorem is therefore misguided. It seems based on a misunderstanding of both the role of the interaction between the consumption of produced commodities and the "consumption of leisure" which in optimal tax models in the Diamond-Mirrlees tradition should be understood as the household's untaxed use of labour, and not as the term "leisure" may be used in common language.…”

Section: Household Preferences With the Explicit Representation Of Thmentioning

confidence: 99%

Welfare Effects of Tax and Price Changes Revisited

Munk¹

2008

SSRN Journal

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Dixit's 1975 paper "Welfare Effects of Tax and Price Changes" constitutes a seminal contribution to the theory of tax reform analysis within a second-best general equilibrium framework. The present paper clarifies ambiguities with respect to normalisation which have led to misinterpretation of some of Dixit's analytical results. It proves that a marginal tax reform starting from a proportional tax system will improve social welfare if it increases the supply of labour, whatever the rule of normalisation adopted, and shows that this result provides the key to understanding what determines the optimal system of commodity taxation. This insight cannot be illustrated by simulation studies using standard additive separable utility functions. However, extending work of Stern (1980, 1981) the paper presents a parameterised utility function with explicit representation of the use of time, the CES-UT, which allows a flexible representation of the relationship between consumption and leisure. This functional form is used to provide a quantitative illustration of the trade-off which defines the optimal tax system and thus desirable directions of tax reform.

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The theory of optimal taxation: what is the policy relevance?

Cited by 51 publications

References 41 publications

Optimal Taxation of Consumption in the Scope of Changing

Optimal Taxation of Consumption in the Scope of Changing

Optimal Capital Income Taxation with Tax Evasion

Welfare Effects of Tax and Price Changes Revisited

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