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A Characteristics Approach to Optimal Taxation: Line Drawing and Tax‐Driven Product Innovation
Author(s) -
Gillitzer Christian,
Kleven Henrik Jacobsen,
Slemrod Joel
Publication year - 2017
Publication title -
the scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/sjoe.12174
Subject(s) - economics , tax basis , indirect tax , ad valorem tax , tax reform , microeconomics , tax credit , value added tax , tax rate , order (exchange) , double taxation , function (biology) , public economics , state income tax , monetary economics , finance , gross income , evolutionary biology , biology
Real‐world tax legislation assigns goods to different categories of tax rates on the basis of observable characteristics, allowing the tax system to handle a constantly evolving set of available goods. We recast the theory of optimal taxation in the language of characteristics, and we show how to optimally draw lines that delineate tax‐rate regimes. Such lines are associated with notches in tax liability as a function of characteristics, creating incentives to introduce goods with new combinations of characteristics in order to reduce tax liability. With a restricted set of tax instruments, such notches are in general part of the second‐best optimal tax system.