International Tax and Public Finance

, Volume 14, Issue 4, pp 383–406 | Cite as

The theory of optimal taxation: what is the policy relevance?

  • Peter Birch Sørensen


The paper discusses the implications of optimal tax theory for the debates on uniform commodity taxation and neutral capital income taxation. While strong administrative and political economy arguments in favor of uniform and neutral taxation remain, recent advances in optimal tax theory suggest that the information needed to implement the differentiated taxation prescribed by optimal tax theory may be easier to obtain than previously believed. The paper also points to the strong similarity between optimal commodity tax rules and the rules for optimal source-based capital income taxation.


Optimal taxation Uniform taxation Tax neutrality 


H21 H25 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Atkinson, A. B., & Stiglitz, J. (1972). The structure of indirect taxation and economic efficiency. Journal of Public Economics, 1, 97–119. CrossRefGoogle Scholar
  2. Atkinson, A. B., & Stiglitz, J. (1976). The design of tax structure: direct versus indirect taxation. Journal of Public Economics, 6, 55–75. CrossRefGoogle Scholar
  3. Auerbach, A. J. (1989). The deadweight loss from ‘non-neutral’ capital income taxation. Journal of Public Economics, 40, 1–36. CrossRefGoogle Scholar
  4. Auerbach, A. J. (2006). The choice between income and consumption taxes: a primer. NBER Working Paper 12307. Google Scholar
  5. Auerbach, A. J., & Hines, J. R. (2002). Taxation and economic efficiency. In A. J. Auerbach & M. S. Feldstein (Eds.), Handbook of public economics (Vol. 3, pp. 1347–1421). Amsterdam: North-Holland. Google Scholar
  6. Becker, G. S. (1965). A theory of the allocation of time. Economic Journal, 75, 493–517. CrossRefGoogle Scholar
  7. Boadway, R., & Gahvari, F. (2006). Optimal taxation with consumption time as a leisure or labor substitute. Journal of Public Economics, 90, 1851–1878. CrossRefGoogle Scholar
  8. Boadway, R., & Richter, W. (2005). Trading off tax distortion and tax evasion. Journal of Public Economic Theory, 7, 361–381. CrossRefGoogle Scholar
  9. Bovenberg, A. L., & Goulder, L. (1996). Optimal environmental taxation in the presence of other taxes: general equilibrium analyses. American Economic Review, 86, 985–1000. Google Scholar
  10. Browning, M., & Meghir, C. (1991). The effects of male and female labour supply on commodity demands. Econometrica, 51, 925–951. CrossRefGoogle Scholar
  11. Chamley, C. (1986). Optimal taxation of capital income in general equilibrium with infinite lives. Econometrica, 54, 607–622. CrossRefGoogle Scholar
  12. Christiansen, V. (1984). Which commodity taxes should supplement the income tax? Journal of Public Economics, 24, 195–220. CrossRefGoogle Scholar
  13. Corlett, W. J., & Hague, D. C. (1953). Complementarity and the excess burden of taxation. Review of Economic Studies, 21, 21–30. CrossRefGoogle Scholar
  14. Diamond, P. (1975). A many-person Ramsey tax rule. Journal of Public Economics, 4, 335–342. CrossRefGoogle Scholar
  15. Diamond, P., & Mirrlees, J. (1971). Optimal taxation and public production (I). American Economic Review, 61, 8–27. Google Scholar
  16. Erosa, A., & Gervais, M. (2002). Optimal taxation in life-cycle economies. Journal of Economic Theory, 105, 338–369. CrossRefGoogle Scholar
  17. Hagen, K. P., Osmundsen, P., & Schjelderup, G. (1998). Internationally mobile firms and tax policy. Journal of International Economics, 45, 77–96. CrossRefGoogle Scholar
  18. Harberger, A. C. (1962). The incidence of the corporation tax. Journal of Political Economy, 70, 215–240. CrossRefGoogle Scholar
  19. Harberger, A. C. (1990). The uniform-tax controversy. In V. Tanzi (Ed.), Public finance, trade, and development (pp. 3–17). Detroit: Wayne State University Press (proceedings of the 44th IIPF congress). Google Scholar
  20. Huizinga, H., & Nielsen, S. B. (1997). Capital income and profits taxation with foreign ownership of firms. Journal of International Economics, 42, 149–165. CrossRefGoogle Scholar
  21. Judd, K. (1985). Redistributive taxation in a simple perfect foresight model. Journal of Public Economics, 28, 59–83. CrossRefGoogle Scholar
  22. Keen, M., & Ligthart, J. (2006). Incentives and information exchange in international taxation. International Tax and Public Finance, 13, 163–180. CrossRefGoogle Scholar
  23. Kleven, H. J. (2004). Optimum taxation and the allocation of time. Journal of Public Economics, 88, 545–557. CrossRefGoogle Scholar
  24. Kleven, H. J., Richter, W., & Sørensen, P. B. (2000). Optimal taxation with household production. Oxford Economic Papers, 52, 584–594. CrossRefGoogle Scholar
  25. Naito, H. (1999). Re-examination of uniform commodity taxes under a non-linear income tax system and its implications for production efficiency. Journal of Public Economics, 71, 165–188. CrossRefGoogle Scholar
  26. Musgrave, P. B. (1969). United States taxation of foreign investment income: issues and arguments. Harvard Law School, International Tax Program: Cambridge. Google Scholar
  27. Piggott, J., & Whalley, J. (1998). VAT base broadening, self supply, and the informal sector. NBER Working Paper 6349. Google Scholar
  28. Pigou, A. C. (1920). The economics of welfare. Macmillan. Google Scholar
  29. Pirttilä, J., & Tuomala, M. (1997). Income tax, commodity tax and environmental policy. International Tax and Public Finance, 4, 379–393. CrossRefGoogle Scholar
  30. Ramsey, F. (1927). A contribution to the theory of taxation. Economic Journal, 37, 47–61. CrossRefGoogle Scholar
  31. Sadka, E. (1977). A theorem on uniform commodity taxation. Journal of Public Economics, 7, 387–391. CrossRefGoogle Scholar
  32. Saez, E. (2002). The desirability of commodity taxation under non-linear income taxation and heterogeneous tastes. Journal of Public Economics, 83, 217–230. CrossRefGoogle Scholar
  33. Saez, E. (2004). Direct or indirect tax instruments for redistribution: short-run versus long-run. Journal of Public Economics, 88, 503–518. CrossRefGoogle Scholar
  34. Salanié, B. (2003). The economics of taxation. Cambridge: MIT Press. Google Scholar
  35. Sandmo, A. (1974). A note on the structure of optimal taxation. American Economic Review, 64, 701–706. Google Scholar
  36. Sandmo, A. (1975). Optimal taxation in the presence of externalities. Swedish Journal of Economics, 77, 86–98. CrossRefGoogle Scholar
  37. Sandmo, A. (1976). Optimal taxation: an introduction to the literature. Journal of Public Economics, 6, 37–54. CrossRefGoogle Scholar
  38. Sandmo, A. (1990). Tax distortions and household production. Oxford Economic Papers, 42, 78–90. Google Scholar
  39. Sandmo, A. (2000). The public economics of the environment. Oxford University Press. Google Scholar
  40. Stiglitz, J., & Dasgupta, P. (1971). Differential taxation, public goods, and economic efficiency. Review of Economic Studies, 38, 151–174. CrossRefGoogle Scholar
  41. Sørensen, P. B. (1997). Public finance solutions to the European unemployment problem? Economic Policy, 25, 223–264. Google Scholar
  42. Sørensen, P. B. (2007). Can capital income taxes survive? And should they? CESifo Economic Studies, 53, 1–57. CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC 2007

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of Copenhagen, EPRU og CESifoCopenhagenDenmark

Personalised recommendations