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Direct versus indirect taxation: the design of the tax structure revisited

Cremer, Helmuth, Pestieau, Pierre and Rochet, Jean-Charles (2001) Direct versus indirect taxation: the design of the tax structure revisited. International Economic Review, 42 (3). pp. 781-800. ISSN 0020-6598

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Identification Number: 10.1111/1468-2354.00133


This article studies the optimal direct/indirect tax mix problem when individuals differ in several unobservable characteristics (productivity and endowments). It presents general expressions for the optimal commodity tax rates and proves that contrary to Atkinson and Stiglitz's (1976) result, differential commodity taxation remains a useful instrument of tax policy even if preferences are separable between labor and produced goods. When cross substitution effects are zero, the expressions resemble traditional many households Ramsey rules. In a Cobb-Douglas illustration, where endowments differ only in good 1 (interpreted as “wealth”), the tax on good 2 provides an indirect way to tax the unobservable wealth.

Item Type: Article
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Additional Information: © 2001 the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association
Divisions: Financial Markets Group
Subjects: H Social Sciences > HB Economic Theory
Date Deposited: 16 Nov 2008 19:00
Last Modified: 20 Sep 2021 01:58

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