Efficient and Equitable Taxation（2003版）.ppt

Efficient and Equitable Taxation Chapter 14 Contents Efficient and Equitable Taxation Optimal commodity taxation At what rates should various goods and services be taxed?The purpose of the theory of optimal commodity taxation is to provide a framework for answering this question. we assume that the only goal is to finance the state’s expenditures with a minimum of excess burden and without using any lump sum tax. Step1: Assuming that the person spends his entire income(the wage rate is w—the price of leisure;T is the amount of time left over after sleep) on commodities X (px)and Y(py) ,(there is no saving),his budget constraint is : w(T-L)=px*X+py*Y ………………(1) Step2:Suppose that it is possible to tax X.Yand Lat the same ad valorem rate –t: wT=(1+t)px*X+ (1+t)py*Y +(1+t)w*L …………….(2) 1/(1+t)wT= px*X+py*Y+wL ……………………… (3) Step3: A proportional tax on the time endowment is in effect a lump sum tax. From Chapter 13 we know that lump sum taxes have no excess burden. Conclusion: We conclude that a tax at the same rate on all commodities, including leisure, is equivalent to a lump sum tax and has no excess burden. (For any value of the wage rate,,an individual cannot change the value of her time endowment.)  Efficient and Equitable Taxation It sounds good, but these is a problem—put a tax on leisure is impossible. The only available tax instruments are taxes on commodities X and Y.It might seem that the solution to this problem is to tax X and Y at the same rate—so-called neutral taxation. We still see that, in general,neutral taxation is not efficient. some excess burden generally is inevitable. Efficient and Equitable Taxation The Ramsey rule: 1.To minimize overall excess burden ,the marginal excess burden of the last dollar of revenue raised from each commodity must be the same. (Figure14.1)P331 △X/X1- △X= △Y/Y1- △Y △X=marginal excess burden X1- △X=marginal ta