Abstract
This paper examines indirect tax reform in Australia using the method developed by Ahmad and Stem (1984). It is usual, in calculating the changes in demand that would result from marginal tax reform, to use aggregate own-price and cross-price demand elasticities. However, the present paper uses an approach in which the demand elasticities are allowed to vary with the value of total expenditure of the household. The pattern of optimal directions of marginal tax changes is found to be influenced by the existence of inequality aversion, though the effect of increasing aversion depends on the commodity group. Both equity and efficiency considerations (arising from the distortion to consumer choice) play a role in determining the preferred direction of marginal reforms.
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