Optimal Commodity Taxation Research Articles

Optimal Commodity Taxation of Traditional and Electronic Commerce

This paper examines theoretical arguments supporting preferential sales tax treatment of electronic commerce, using a version of the standard optimal commodity tax model that includes distributional concerns, tax-exempt goods, a subset of individuals with highly elastic demand for Internet goods (which are close but imperfect substitutes for similar goods sold by traditional retailers), and relatively high administrative costs of taxing electronic commerce. The analysis concludes that tax exemption of electronic commerce is unlikely to be even close to optimal, with the optimal tax differentials calculated suggesting that the traditional prescription of uniform taxation of traditional and electronic commerce should not be overridden by optimal taxation concerns.

SOME EMPIRICAL EVIDENCE ON DEMAND SYSTEM* AND OPTIMAL COMMODITY TAXATION

We have two major tasks in this paper. The first is to obtain a reasonable estimate of the Japanese demand system, which includes leisure, income and commodity choices. The second is to compute and evaluate the optimal tax equilibrium. The estimation result, based on the Almost Ideal Demand System, is found to be consistent with the microeconomic theory. We evaluate the optimal commodity tax structure by calculating the equilibria under lump-sum, optimal commodity and uniform commodity taxation schemes. The deadweight losses under uniform taxation are very small, and the optimal commodity tax rates are strikingly close to uniform.

A New Approach to Optimal Commodity Taxation

This paper makes a fresh attempt at characterizing optimal com- modity taxes. Under the usual assumptions, an extremely simple expression of second-best commodity taxes is derived, showing tax rates as functions of observable variables only, rather than as functions of unobservable variables such as compensated cross elasticities. The main formula is independent of special preferences, and independent of the number of commodities. It has a simple economic meaning and could be particularly useful for empirical re- search. Examples and remarks on the normalization problem are provided

Rules of Normalisation and Their Importance for Interpretation of Systems of Optimal Taxation

The adoption of proper rules of normalisation is in general considered a trivial problem which deserves little attention. Possibly for that very reason errors in normalisation have resulted in flawed interpretations of the conditions for optimal commodity taxation. We state based on an explicit representation of the general equilibrium conditions the rules of normalisation in standard optimal tax models. This allows us to provide an intuitive explanation of what determines the optimal tax system. Finally, we review a number of examples where lack of precision with respect to normalisation in otherwise important contributions to the literature on optimal taxation has given rise to misinterpretations of analytical results.

User charges and priority setting in health care: balancing equity and efficiency

User charges are the major source of finance for many health care systems. However, traditional approaches to health care priority setting, such as cost-effectiveness analysis, usually assume there are no user charges and therefore may ignore important implications for equity and efficiency. This paper therefore develops a rudimentary model of priority setting in which the fixed health care budget can be augmented by user charges. The paper uses methods analogous to models of optimal commodity taxation to develop a set of rules for the inclusion of a health technology in the subsidized health care package, and the calculation of its associated copayment rate. The results indicate that optimal levels of subsidy depend on the cost-effectiveness of the intervention, its price elasticity of demand, the epidemiology of the associated disease, and the policy maker's attitude towards equity. The model has important implications for policy making in three domains: health care priority setting, evaluation of health care technologies, and charging policy.

Optimal Commodity Taxes with Tourist Demand

With tourism, the existence of country-specific commodities that have to be bought and consumed locally plays an essential role. The paper is about how optimal taxation rules are modified when the taxable goods include goods demanded by tourists. The main point is that tax rates can be manipulated to shift some of the tax burden from domestic residents onto tourists. There is indeed a reason why an optimum taxation approach is useful for tourism, as the goods are consumed inside the host country, and discrimination is difficult. The paper combines several scenarios where tourism may be relevant for optimal tax policy. It begins by considering the determinants of tourist demand. Then, the well-known optimal commodity tax rules are modified to include the effect of foreign demand. Tourists are assumed to trade at the same prices as domestic consumers, but to have zero welfare weight. Thus, the government must balance the desire to tax tourists with the deadweight loss suffered by its own residents. The government should raise some taxes, when tourism begins. Tourism-oriented goods with low price elasticities should bear the highest taxes. However, tourism-related pollution cannot be taxed at prohibitive rates or tourist revenue would be lost altogether. Possible extensions are introduced, for example competition among destination countries. Should tourism dependent countries that are geographical neighbours and substitutes have closely linked tax systems? What kind of tax policy is best when the tourist destinations serve as complements to each other?

Optimal Commodity Taxation When Land and Structures Must Be Taxed at the Same Rate

We show that the optimal property tax rate rises with the ratio of land rents to structure and land development costs. California's high ratio of income to property tax revenue and the distribution of Federal housing subsidies thus appear geographically misplaced. Proportional taxation of non-housing commodities is not optimal, even when elasticities with respect to wages are identical. Absent externalities, the desirability of transportation taxes and anti-sprawl growth controls hinge on the relative importance of time versus money in commuting costs.

Do States Tax Wireless Services Inefficiently? Evidence on the Price Elasticity of Demand

The taxation of goods and services by a state is considered efficient when consumer welfare is maximized subject to the condition that the local government raises a specified amount of revenues. According to the Ramsey principle of optimal taxation of commodities, an efficient commodity tax induces little change in consumer behavior and does not fall on a good that is relatively important in the budgets of the poor. Therefore, the optimal commodity tax is one that consumers cannot easily avoid, a characteristic that leads to the conclusion that a particular tax's efficiency will be greater the more insensitive is consumer demand to the price of that good. States are increasingly relying on the taxation of wireless services as a source of revenue. For example, the average wireless consumer in New York pays a 16 percent tax on his wireless bill, which is nearly double that of the average business tax in New York. In fact, the average state tax rate on wireless services exceeds the average state tax on general business services by 2.34 percentage points. States have not, however, analyzed consumer demand for wireless services to determine whether it is efficient to tax wireless services with such intensity. In this paper, we estimate the own-price elasticity of demand for wireless service using a survey dataset of wireless consumption. Using data on wireless consumption between 1999 and 2001, we find that the own-price elasticity of demand for wireless services is between -1.12 and -1.29. With these elasticity estimates, we find that reducing the taxation of wireless services by one dollar would improve economic welfare by between $1.23 and $1.95. This empirical finding calls into question the wisdom of the high taxes that many states impose on wireless services.

A Method of Calculating Regional Consumer Price Differentials with Illustrative Evidence from India

In this paper we propose a method of estimating multilateral regional price index numbers from a given household level data set on item‐wise unit values/prices. The method is closely related to the Country‐Product Dummy variable model of Summers (1973). This method is likely to be particularly useful in studies of regional comparisons of poverty and inequality, optimal commodity taxes and tax reforms. To illustrate the method, we use it to calculate the regional consumer price index numbers for Eastern, Western and Southern India (taking Northern India as the reference region) separately for three categories of rural and urban households, viz., all households and those below and above the poverty line, using household level unit records of the NSS 50th round (1993–94) Consumer Expenditure Survey.

Optimal Commodity Taxes with Tourist Demand

The existence of country-specific commodities that have to be bought and consumed locally plays an essential role in tourism. This paper discusses how optimal taxation rules are modified when the taxable goods include goods demanded by tourists. The main point is that tax rates can be manipulated to shift some of the tax burden from domestic residents onto tourists. There is indeed a reason why an optimum taxation approach is useful for tourism, as the goods are consumed inside the host country, and discrimination is difficult.This paper combines several scenarios where tourism may be relevant for optimal tax policy. It begins by considering the determinants of tourist demand. Then, the well-known optimal commodity tax rules are modified to include the effect of foreign demand. Tourists are assumed to trade at the same prices as domestic consumers, but to have zero welfare weight. Thus, the government must balance the desire to tax tourists with the deadweight loss suffered by its own residents. The government should raise some taxes, when tourism begins. Tourism-oriented goods with low price elasticities should bear the highest taxes. However, tourism-related pollution cannot be taxed at prohibitive rates or tourist revenue would be lost altogether. Possible extensions are introduced, for example competition among destination countries. Should tourism dependent countries that are geographical neighbours and substitutes have closely linked tax systems? What kind of tax policy is best when the tourist destinations serve as complements to each other?

Optimal commodity taxes for Brazil based on AIDS preferences

In this study we calculate optimal commodity taxes for Brazil. Simulations are based on the Almost Ideal Demand System , estimated using Brazilian household data. The trade off between equity and efficiency is taken into account by introducing a government aversion to inequality parameter into a social welfare function, which is maximized subject to a balanced government budget requirement. Our results show that the optimal commodity tax structure is characterized by selective tax rates when the only tax policy instrument available is commodity taxation. We extend the analysis by allowing for a uniform poll payment to be made by the government. In this case tax rates are regressive and poll transfer levels are unreasonably high. When we cap transfers with a binding ceiling the former pattern is restored. Comparing with Siqueira (1998), we have also observed a relative robustness of optimal tax rates to household preferences forms.

A New Approach to Optimal Commodity Taxation

A New Approach to Optimal Commodity Taxation

Optimal commodity taxation for reduction of envy

This paper derives optimal commodity taxes in a two-class economy based on λ-equitability. An allocation is λ-equitable if no agent envies a proportion λ of the bundle of any other agent. We examine the properties of Pareto undominated allocations in a class of λ-equitable allocations. We first show that the consistency between envy reduction and enhancement of the low-skilled agent’s utility depends on 1) the income elasticity of leisure 2) the degree of preference and skill differences. On the optimal tax rule, we can show the following. When the envy constraint is binding, ceteris paribus, the goods preferred by the low skilled agent and of high Hicksian elasticities are taxed more heavily. The optimal commodity tax is uniform if, in addition to weak separability, sub-utility of the goods is homothetic.

Distributional Effects of Optimal Commodity Taxes Combined with Minimum Income Programs in Brazil

Commodity taxes play an important role in Brazil and raise around 60% of the total tax revenue. This heavy reliance renders commodity taxation one of the main tools available to the government for collecting revenue and securing redistribution. In fact, Brazilian income inequity is one of the highest in the world: the wealthiest 1% of population, equivalent to 1.6 million people, earn together as much as the 50% poorest, around 80 million. The purpose of this paper is a partial equilibrium numerical micro-simulation of the distributional effects of optimal commodity taxation combined with minimum income transfers made by the government to households. The approach used to measure households welfare is a money metric indirect utility or equivalent income [King (1983)], obtained from an Almost Ideal Demand System set of parameter estimates. We plug it into the equivalent variation formula to evaluate the equity effects specified in terms of the equivalent income. The data source is a 1995-1996 national household expenditure survey, though estimated parameters come from a sample comprising a 1987-1988 wave as well. We find that our proposed minimum income programs combined with selectiveness in commodity tax structure would be useful as redistribution income instrument among households in Brazil. These results can provide some valuable contribution in the context of the increasing discussion about minimum income programs in Brazil associated with demographic characteristics such as education and family size.

Oligopoly Deregulation and the Taxation of Commodities

We examine market structure and optimal commodity taxation in a world in which firms produce differentiated products and can exert some degree of market power. Building on Kay and Keen (1983), we model two forms of product technologies, two forms of market entry structures, and two forms of pricing. This yields eight models providing a richer analysis of the role of taxes as regulatory tools than could be provided in Kay and Keen's analysis. In the presence of price discrimination, tax policy loses much of its effectiveness at serving as a substitute for direct regulation. Moreover, in cases where taxes can influence market structure, subsides rather than taxes may be required to achieve optimum market structure. Our results should remove the presumption that has developed over the past twenty years that the ad valorem tax rate should be positive to discourage excess entry in imperfectly competitive markets.

Optimal commodity taxation with moral hazard and unobservable outcomes.

The optimal public insurance-taxation scheme is derived for a model with unobservable outcomes. If the government can only observe aggregate commodity expenditures, reimbursement insurance is constrained-efficient. However, two distortions accompany the reimbursement scheme. First, consumers are induced to take (forego) actions which increase (decrease) the likelihood of adverse outcomes (i.e., ex ante moral hazard). Second, reimbursement insurance creates a subsidy distortion (i.e., ex post moral hazard). Ex ante moral hazard calls for taxation (subsidization) of commodities which increase (decrease) the probability of adverse outcomes. The second distortion calls for taxation (subsidization) of commodities which are sufficiently strong complements to (substitutes for) the insured commodity. An example centered on cigarettes and medical insurance is presented.

Optimal Taxation and Normalisations

There still seems to be some confusion about the consequences of normalisations in the optimal taxation literature. We claim that: 1) Normalisations do not matter for the real solution of optimal taxation problem. 2) Normalisations do matter for good characterisations of the solutions to optimal taxation problems. Whereas the first point is uncontroversial, the second one is less well understood. There is also a need to distinguish between the following senses of taxation of endowment: 1) The taxation of own consumption of initial endowments (e.g. leisure). 2) The taxation of the sale of initial endowments (e.g. labour). By postponing the normalisation of consumer prices, we detail how normalisations of consumer prices affect the characterisation of optimal commodity taxes, derive the preferred characterisation, and show how it depends on the normalisation. On the way, we discuss the effect of normalisations on measures of the marginal efficiency loss of taxation.

On Environmental Taxation under Uncertain Environmental Damage

This paper addresses optimal taxation, when therelationship between the consumption of a`dirty' good and the resulting environmentaldamage is uncertain and treated as a randomvariable by policy makers. The main purpose isto analyze how increased uncertainty, measuredas a mean preserving increase in the spread ofthis random variable, affects the optimalcommodity tax on the dirty consumption good. Incase the only task of government is to correctthe environmental externality, and if thepreferences are characterized by nondecreasingabsolute risk aversion, we find that thecommodity tax on the dirty consumption goodincreases in response to additionaluncertainty. If, on the other hand, thegovernment provides a public good and uses alump-sum tax in addition to the commodity tax,it is possible that the commodity tax decreasesas a response to additional uncertainty, evenif the preferences are characterized bynondecreasing absolute risk aversion. A similarresult emerges, although for different reasons,if the lump-sum tax is replaced by a laborincome tax.

Optimum taxation and the allocation of time

A theory of optimal taxation is presented, building upon Becker's (1965) theory of the allocation of time. Optimal commodity taxation is governed by factor shares in household activities. Any market good which requires little household time, or even saves time, should carry a relatively low tax rate. This policy rule does not require the estimation of price elasticities and is therefore more applicable than traditional Ramsey rule taxation.

Optimal Commodity Taxes in Australia

The recent changes to commodity taxes in Australia have led to renewed interest in a classic question in public finance: should the tax rates be uniform or differentiated? This article attempts to answer this question by calculating optimal commodity taxes in Australia for a nine‐item disaggregation. The estimates point to non‐uniform commodity taxes, even from the viewpoint of an inequality‐insensitive tax planner. The optimal commodity taxes bear little resemblance with the pre‐GST or post‐GST tax rates. No less significant is our observation that even the purely efficiency‐driven optimal commodity taxes imply lower real expenditure inequality than the actual taxes.