401-moreontaxation

401-moreontaxation - E 401 1 More on taxation So we know...

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E frqrplfv 401 1 More on taxation So we know from earlier notes that: (1) in a two-good (or n -good)wor ldwherebothgoodscanbetaxedthebudget 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 ,wh e r e 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 can’t 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? Thebudgetconstra intcou ldbewr ittenas (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 )
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E frqrplfv 401 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 government’s 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,
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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.

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401-moreontaxation - E 401 1 More on taxation So we know...

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