Direct or Indirect Tax Instruments for Redistribution: Short-run versus Long-run / Emmanuel Saez.

Format:

Book

Author/Creator:

Saez, Emmanuel.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w8833.

NBER working paper series no. w8833

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Direct or Indirect Tax Instruments for Redistribution

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2002.

Summary:

Optimal tax theory has shown that, under weak assumptions, indirect taxation such as production subsidies, tariffs, or differentiated commodity taxation, are sub-optimal and that redistribution should be achieved solely with the direct income tax. However, these important results of optimal tax theory, namely production efficiency and uniform commodity taxation under non-linear income taxation, have been shown to break down when labor taxation is based on income only and when there is imperfect substitution of labor types in the production function. These results in favor of indirect tax instruments are valid in the short-run when skills are exogenous and individuals cannot move from occupation to occupation. In the long-run, it is more realistic to assume that individuals choose their occupation based on the relative after-tax rewards. This paper shows that, in that context, production efficiency and the uniform commodity tax result are restored. Therefore, in a long-run context, direct income taxation should be preferred to indirect tax instruments to raise revenue and achieve redistribution.

Notes:

Print version record

March 2002.