Abstract
This study investigates, on a nine commodity disaggregation of Indian budget data (NSS, 28th round), the sensitivity of ‘optimal’ commodity tax rates to alternative demand systems. LES and RNLPS. ‘Optimality’ is used here in the very special sense of being conditional on observed expenditure and fixed consumer prices. The alternative sets of tax rates agree at low levels of ‘inequality aversion’ but disagree widely at ‘Rawlsian’ levels. LES is heavily rejected in favour of its one-parameter generalisation, RNLPS. The results suggest that LES price elasticities should not be used in ‘optimal’ tax calculations. The ‘optimal’ tax rates imply only a modest redistribution.
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