The Case for Uniform Commodity Taxation: A Tax Reform Approach

Abstract

Generalizing the tax reform approach of Laroque (2005), Kaplow (2006) and Hellwig (2009), we show that for any arbitrary income tax system differential commodity taxation can be Pareto-dominated by a uniform rate with a suitably reformed income tax. Under particular preference specifications, we derive the explicit income tax reforms required in an representative-agent economy and when there is linear progressive, piecewise linear and nonlinear income taxation. Optimal uniform commodity results of Sandmo (1974), Atkinson and Stiglitz (1976) and Deaton (1979) apply with involuntary unemployment and when individuals differ in preferences for leisure and make extensive labour supply decisions.