Consumption Taxation

Question 1

assumptions of ramsey problem

Answer 1

lump sum taxation is infeasible

at least one commodity cannot be taxed (usually leisure)

producer prices fixed (set to one for simplicity)

many people with same preferences

Question 2

how to minimise total excess burden Ramsey problem

Answer 2

tax rates should be set so that the percentage reduction in the quantity demanded of each commodity is the same

Question 3

inverse elasticity rule

Answer 3

tx/ty=ey/ex

Question 4

corlett-hague rule

Answer 4

efficient taxation requires taxing the good that is more complementary with leisure at a higher rate

Question 5

real world issues with ramsey rules

Answer 5

cross-price demand elasticities are hard to estimate

administrative complexity

creation of new goods and tax driven product innovation

equity: low-income consumers spend a larger share of their income on necessities than high-income consumers

Question 6

features of consumption taxes in most developed countries:

Answer 6

relatively broad base

small number of tax rates

taxes defined by characteristics of goods

Question 7

tax salience assumption

Answer 7

traditional model assumes that all individuals are fully aware of taxes that they pay

Question 8

effect of tax salience

Answer 8

the less salient is the tax on consumers, the larger is the incidence on consumers and the smaller is the incidence on producers