Abstract
A simple procedure for calculating optimal commodity taxes is proposed, which takes into account the simultaneous interdependence of taxes, expenditure, and price levels/responses. The method also allows for the social marginal utility of income to depend on prices, besides expenditures, in a manner implied by the assumed preference functional form. Illustrative calculations on Indian budget data provide evidence not only in favor of the procedure, but of considerable sensitivity of directions of marginal tax reforms to the data set (rural or urban) used, and of optimal tax estimates to demand functional form. Copyright 1989 by The editors of the Scandinavian Journal of Economics.
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