A Characteristics Approach to Optimal Taxation: Line Drawing and Tax-Driven Product Innovation

Christian Gillitzer, Henrik Jacobsen Kleven, Joel Slemrod

Research output: Contribution to journalArticlepeer-review

6 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)240-267
Number of pages28
JournalScandinavian Journal of Economics
Volume119
Issue number2
DOIs
StatePublished - Apr 1 2017
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Keywords

  • H21
  • Notches
  • tax design

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