A characteristics approach to optimal taxation: line drawing and tax-driven product innovation

Gillitzer, Christian, Kleven, Henrik Jacobsen and Slemrod, Joel (2017) A characteristics approach to optimal taxation: line drawing and tax-driven product innovation. Scandinavian Journal of Economics, 119 (2). pp. 240-267. ISSN 0347-0520

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Abstract

Real-world tax legislation assigns goods to different categories of tax rates on the basis of observable characteristics, allowing the tax system to handle a constantly evolving set of available goods. We recast the theory of optimal taxation in the language of characteristics, and we show how to optimally draw lines that delineate tax-rate regimes. Such lines are associated with notches in tax liability as a function of characteristics, creating incentives to introduce goods with new combinations of characteristics in order to reduce tax liability. With a restricted set of tax instruments, such notches are in general part of the second-best optimal tax system.

Item Type:	Article
Official URL:	http://onlinelibrary.wiley.com/journal/10.1111/(IS...
Additional Information:	© 2017 The Editors of The Scandinavian Journal of Economics
Divisions:	Economics
Subjects:	H Social Sciences > HJ Public Finance
JEL classification:	H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency; Optimal Taxation
Sets:	Departments > Economics Collections > Economists Online
Date Deposited:	16 Mar 2017 09:34
Last Modified:	20 Jan 2020 06:27
URI:	http://eprints.lse.ac.uk/id/eprint/69821

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