Chapter 14-Efficient and Equitable Taxation Public economics
1 Chapter 14 – Efficient and Equitable Taxation Public Economics
Optimal Commodity Taxation Assume that the goal is to finance expenditures with a minimum of excess burden Assume lump sum taxes are infeasible ·3 commodities Good x.y and leisure Prices Px, Py, and w
2 Optimal Commodity Taxation • Assume that the goal is to finance expenditures with a minimum of excess burden. • Assume lump sum taxes are infeasible. • 3 commodities: – Good X, Y, and leisure – Prices PX , PY , and w
Optimal Commodity Taxation Time endowment is fixed at T The full budget constraint can be written as WT=PX+PY+wl
3 Optimal Commodity Taxation • Time endowment is fixed at: T • The full budget constraint can be written as: wT P X P Y wl = X + Y +
Optimal Commodity Taxation Case 1-All goods can be taxed If all commodities can be taxed, imposing equal ad-valorem tax rates yields W7=(1+)fX+(1+)P+(1+)wt WT -PX+Pytwl 1+
4 Optimal Commodity Taxation: Case 1 – All goods can be taxed • If all commodities can be taxed, imposing equal ad-valorem tax rates yields: wT ( t)P X ( t)P Y ( t)wl = 1+ X + 1+ Y + 1+ ( ) wT t P X P Y wl X Y 1+ = + +
Optimal Commodity Taxation Case 1-All goods can be taxed In this case, the inability to impose a lump sum tax is irrelevant The government can effectively take away a lump sum amount through equal taxes on all commodities(including leisure) · No excess burden
5 Optimal Commodity Taxation: Case 1 – All goods can be taxed • In this case, the inability to impose a lump sum tax is irrelevant. • The government can effectively take away a lump sum amount through equal taxes on all commodities (including leisure). • No excess burden