Advertisement

Optimal Commodity Taxation with Tax Brackets Under Vertical Product Differentiation

  • Kiyoshi Arakawa
Chapter
Part of the New Frontiers in Regional Science: Asian Perspectives book series (NFRSASIPER, volume 18)

Abstract

In this paper, we analyze the effects of commodity taxation with tax brackets under a vertically differentiated multiproduct monopoly and show an optimal taxation scheme. The tax brackets are classified by product qualities. A monopolist with two products determines the prices and qualities of the products that will maximize his profit, given the tax brackets. Based on this monopolistic behavior, the government determines taxation using tax brackets that will maximize social welfare (SW). In such a taxation plan, because there may be notches at different tax thresholds, by analyzing the effects of the notches on SW, we are able to show whether setting notches can improve SW. Our results are as follows. The optimal taxation plan levies a tax on the low-quality side of the tax bracket and grants a subsidy on the high-quality side of the bracket. On the high-quality side of the bracket, the subsidy helps give incentives to the monopolist to improve product qualities. On the other hand, on the low-quality side of the bracket, the tax levied helps reduce the monopolist’s incentive to position on the low-quality side of the bracket, that is, it induces the monopolist to position the product on the high-quality side of the bracket. Furthermore, the government can induce the monopolist to improve product qualities by raising the tax threshold and binding the low-quality product to the threshold. That is, the government can improve SW by inducing two products to locate on the high-quality side of the bracket to improve their quality.

Notes

Acknowledgements

This research is supported by a Grant-in-Aid for Scientific Research (15K03453) from the Japan Society for the Promotion of Science.

References

  1. Arakawa, K. 2012. The comparison between specific and ad valorem taxation under vertically differentiated oligopoly. Studied in Applied Economics 6: 85–104.Google Scholar
  2. Arakawa, K. 2014. An optimal piecewise specific taxation in a vertically differentiated oligopoly. Studies in Applied Economics 8: 95–114.Google Scholar
  3. Blinder, A.S., and H.S. Rosen. 1985. Notches. American Economic Review 75(4): 736–47.Google Scholar
  4. Brander, J.A., and J. Eaton. 1984. Product line rivalry. American Economic Review 74(3): 323–34.Google Scholar
  5. Cremer, H., and J.-F. Thisse. 1994. Commodity taxation in a differentiated oligopoly. International Economic Review 35: 613–33.CrossRefGoogle Scholar
  6. Dharmapala, D., J. Slemrod, and J.D. Wilson. 2011. Tax policy and the missing middle: Optimal tax remittance with firm-level administrative costs. Journal of Public Economics 95(9–10): 1036–1047.CrossRefGoogle Scholar
  7. Gillitzer, C., H.J. Kleven, and J. Slemrod. 2015, forthcoming. A characteristics approach to optimal taxation: Line drawing and tax-driven product innovation. Scandinavian Journal of Economics 119(2): 240–267.CrossRefGoogle Scholar
  8. Kleven, H.J., and M. Waseem. 2013. Using notches to uncover optimization frictions and structural elasticities: Theory and evidence from Pakistan. Quarterly Journal of Economics 128(2): 669–723.CrossRefGoogle Scholar
  9. Lancaster, K. 1975. Socially optimal product differentiation. American Economic Review 65(4): 567–85.Google Scholar
  10. Mussa, M., and S. Rosen. 1978. Monopoly and product quality. Journal of Economic Theory 18: 301–317.CrossRefGoogle Scholar
  11. Slemrod, J. 2013. Buenas notches: Lines and notches in tax system design. eJournal of Tax Research 11(3): 259–283.Google Scholar
  12. Slemrod, J., S. Yitzhaki, J. Mayshar, and M. Lundholm. 1994. The optimal two-bracket linear income tax. Journal of Public Economics 53(2): 269–290.CrossRefGoogle Scholar

Copyright information

© Springer Nature Singapore Pte Ltd. 2017

Authors and Affiliations

  • Kiyoshi Arakawa
    • 1
  1. 1.Faculty of Social Information StudiesOtsuma Women’s UniversityTokyoJapan

Personalised recommendations