Abstract
The Mirrlees Review recommends that commodity taxation should in general be uniform, but with some goods consumed in conjunction with labour supply (such as child care) left untaxed. This article examines the validity of this claim in an optimal income tax framework. Contrary to the recommendation of the review, our theoretical results imply that even if all goods other than the good needed for working are separable from leisure, the optimal tax on these goods should not be uniform. Instead, commodity taxes should discourage consumption of goods with large expenditure elasticities. Our results imply that the optimal commodity tax system is dependent on the expenditure side of the government. For instance, if the government fully subsidizes the cost of the good needed for working, then commodity taxation is uniform under the standard separability assumption. Calibration exercises suggest that these results can be quantitatively important.
Highlights
In the authoritative treatment of the normative implications of tax theory, the Mirrlees Review, a uniform structure of commodity tax rates, with the possible exception of child care is recommended
We find that when all goods are weakly separable from leisure but there is a need to purchase a good in order to work commodity taxation of those goods that are separable from labour supply should not be uniform
A recommendation in the recent Mirrlees review is that commodity taxes should be uniform, with the exception that child care should not be taxed
Summary
Provided in Cooperation with: Ifo Institute – Leibniz Institute for Economic Research at the University of Munich. A Counterargument to the Recommendation in the Mirrlees Review, CESifo Working Paper, No 4240, Center for Economic Studies and ifo Institute (CESifo), Munich. Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen. Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. 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. Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence
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