Marginal and non-marginal commodity tax reforms with rank two and rank three demographic demand systems

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Abstract

This paper shows that the insensitivity of marginal commodity tax reforms to demand specification does not extend to the non-marginal case. The size of the tax change has a sharp impact on commodity tax reforms. Unlike price effects, neither household composition nor quadratic Engel curves alters significantly the direction of tax change. The first order approximation overestimates the welfare cost of tax change, and the bias increases sharply with the size of the change. The quality of the approximation also deteriorates with increasing inequality aversion making a Rawlsian less likely than an utilitarian to use the marginal framework.
Original languageEnglish
Pages (from-to)689 - 712
Number of pages24
JournalOxford Economic Papers
Volume51
Issue number4
DOIs
Publication statusPublished - 1999
Externally publishedYes

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