On Optimal Commodity Taxes When Consumption is Time Consuming

27 Pages Posted: 11 Dec 2007

See all articles by Firouz Gahvari

Firouz Gahvari

University of Illinois at Urbana-Champaign - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: 2005-07-26

Abstract

This paper studies the problem of optimal taxation of commodities when consumption is a time-consuming activity. This is done under two distinct preference separability assumptions: between goods and labor supply, and between goods and leisure. It argues that with the labor separability, the traditional uniform taxation results of optimal tax theory continue to hold. With leisure separability, on the other hand, consumption time is a major ingredient of optimal tax rates. However, the relationship between consumption time and optimal tax rates depends crucially on the representation of the economy. In representative consumer economies, time differences determine the pattern of optimal tax rates so that goods whose consumption take more time are subjected to higher tax rates. When individuals have different earning abilities, re-distributive, incentive, and efficiency considerations also come into play resulting in a complex relationship. The paper derives formulas for optimal commodity taxes in this case on the basis of three different tax structures: linear commodity taxes in combination with linear and nonlinear income taxes, and nonlinear commodity taxes in combination with nonlinear income taxes.

Suggested Citation

Gahvari, Firouz, On Optimal Commodity Taxes When Consumption is Time Consuming (2005-07-26). Journal of Public Economic Theory, Vol. 9, Issue 1, pp. 1-27, February 2007, Available at SSRN: https://ssrn.com/abstract=1066048 or http://dx.doi.org/10.1111/j.1467-9779.2007.00295.x

Firouz Gahvari (Contact Author)

University of Illinois at Urbana-Champaign - Department of Economics ( email )

313 David Kinley Hall, 1407 West Gregory Drive
Urbana, IL 61801
United States

HOME PAGE: http://www.economics.illinois.edu/people/fgahvari

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschingerstr. 5
Munich, DE-81679
Germany

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