Ramsey Strikes Back: Optimal Commodity Tax and Redistribution in the Presence of Salience Effects
AbstractAn influential result in modern optimal tax theory, the Atkinson and Stiglitz (1976) theorem, holds that for a broad class of utility functions, all redistribution should be carried out through labor income taxation, rather than differential taxes on commodities or capital. An important requirement for that result is that commodity taxes are known and fully salient when consumers make income-determining choices. This paper allows for the possibility consumers may be inattentive to (or unaware of) some commodity taxes when making choices about income. We show that commodity taxes are useful for redistribution in this setting. In fact, the optimal commodity taxes essentially follow the classic "many person Ramsey rule" (Diamond 1975), scaled by the degree of inattention. As a result, to the extent that commodity taxes are not (fully) salient, goods should be taxed when they are less elastically consumed, and when they are consumed primarily by richer consumers. We extend this result to the setting of corrective taxes, and show how non-salient corrective taxes should be adjusted for distributional reasons.
CitationAllcott, Hunt, Benjamin Lockwood, and Dmitry Taubinsky. 2018. "Ramsey Strikes Back: Optimal Commodity Tax and Redistribution in the Presence of Salience Effects." AEA Papers and Proceedings, 108: 88-92. DOI: 10.1257/pandp.20181040
- H21 Taxation and Subsidies: Efficiency; Optimal Taxation
- H23 Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- H24 Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
- H25 Business Taxes and Subsidies including sales and value-added (VAT)