Abstract
AbstractWe consider a standard optimal taxation framework in which consumers' preferences are separable in consumption and labor and identical over consumption, but are affected by consumption externalities. For every nonlinear, income‐dependent pricing of goods there is a linear pricing scheme, combined with an adjusted income tax schedule, that leaves all consumers equally well‐off and weakly increases the government's budget. The result depends on whether a linear pricing scheme exists that keeps the aggregate amount of consumption at its initial level observed under nonlinear pricing. We provide sufficient conditions for the assumption to hold. If adjusting the income tax rate is not available, personalized prices for an externality can enhance social welfare if they are redistributive, that is, favor consumers with a larger marginal social value of income.
Highlights
| INTRODUCTIONIn a famous result, Atkinson and Stiglitz (1976) showed that, at the second‐best optimal allocation, commodity taxation is superfluous when income taxation is present. Laroque (2005) extended this result to suboptimal allocations, showing that if the income tax can be adjusted, every allocation with commodity taxation is weakly dominated by an allocation without commodity taxation
In a famous result, Atkinson and Stiglitz (1976) showed that, at the second‐best optimal allocation, commodity taxation is superfluous when income taxation is present. Laroque (2005) extended this result to suboptimal allocations, showing that if the income tax can be adjusted, every allocation with commodity taxation is weakly dominated by an allocation without commodity taxation.J Public Econ Theory. 2021;23:363–375.| wileyonlinelibrary.com/journal/jpet 363 | 364FLEURBAEY AND KORNEKRecent works modify the Atkinson and Stiglitz (1976) model to include consumption externalities
Personalized prices are useless when distributional concerns are fully handled via income taxation
Summary
In a famous result, Atkinson and Stiglitz (1976) showed that, at the second‐best optimal allocation, commodity taxation is superfluous when income taxation is present. Laroque (2005) extended this result to suboptimal allocations, showing that if the income tax can be adjusted, every allocation with commodity taxation is weakly dominated by an allocation without commodity taxation. Recent works modify the Atkinson and Stiglitz (1976) model to include consumption externalities They show conditions under which optimal prices for externalities follow first‐best rules and are unique and linear, that is, do not depend on the pretax income of agents or the quantity of externality‐generating goods that is consumed (Gauthier & Laroque, 2009; Jacobs & de Mooij, 2015; Kaplow, 2012). Our main result shows a possibility: given a nonlinear, income‐dependent pricing system for externalities, and given our assumptions, a linear pricing system with an appropriately adjusted income tax schedule performs (weakly) better. Sheshinski (2004) showed that optimal taxes for an externality should be higher for richer consumers if the income tax system does not sufficiently redistribute We extend these results by considering suboptimal commodity taxation and introducing labor choices. Let Ui denote consumer i's utility at this equilibrium, and Vi the subutility from consumption
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