601-2goodsleisure

601-2goodsleisure - E frqrplfv 601 1 More on taxation So we...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: E frqrplfv 601 1 More on taxation So we know from earlier notes that: (1) in a two-good (or n-good) world where both goods can be taxed the budget constraint is (1 + t 1 ) p 1 x 1 + (1 + t 2 ) p 2 x 2 = wealth and setting t 1 = t 2 = t is equivalent to a tax on wealth, t w , where 1 t w 1 / (1 + t ) , which is a lump-sum tax; (2) in a two-good world where one of the goods is leisure which cant be taxed, a consumption tax (1 + t ) pc = w ( T l ) is equivalent to an earnings tax pc = (1 t ) w ( T l ) and either one of them will cause deadweight loss. We also know that the dead- weight loss works solely o f the substitution e f ect no substitution e f ect, no dead- weight loss. What is the optimal tax structure in a three-good world, where leisure is one of the goods? The budget constraint could be written as (1 + t 1 ) p 1 x 1 + (1 + t 2 ) p 2 x 2 = (1 t ) w ( T l ) But, as we noted above, this system would be duplicated by 1 + t 1 1 t p 1 x 1 + 1 + t 2 1 t p 2 x 2 = w ( T l ) or (1 + t 1 ) p 1 x 1 + (1 + t 2 ) p 2 x 2 = w ( T l ) So the question becomes when should t 1 > t 2 ? Rewriting the budget constraint as E frqrplfv 601 2 wl + (1 + t 1 ) p 1 x 1 + (1 + t 2 ) p 2 x 2 = wT it is clear that the only barrier to a f rst-best outcome is the governments inabil- ity to tax leisure. It follows that the answer to the question must revolve around which of goods 1 or 2 is more complementary with leisure, and from (2) above,...
View Full Document

This note was uploaded on 01/26/2012 for the course ECON 401 taught by Professor Burbidge,john during the Fall '08 term at Waterloo.

Page1 / 4

601-2goodsleisure - E frqrplfv 601 1 More on taxation So we...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online