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Consumption Indivisibility and Optimal Commodity Taxation: And Its Applicability on Lobbying by Interest Groups (in Chinese)

  • Author Chun-Hui Lu, Shao-Fan Hsu, and K. L. Glen Ueng
  • Abstract The traditional literature on the optimal commodity tax system ignores two important economic facts: indivisibility of consumption and interest groups which may lobby for commodity tax policies. In view of this, this paper explores two solutions: the efficiency solution and political equilibrium solution. According to our research, based on the fact that only the high-type taxpayers will buy the indivisible goods, (i) the commodity tax on indivisible goods acts as differential lump-sum taxes, which leads to the optimal commodity tax on the indivisible goods should be given priority to taxation under the premise that high-ability taxpayers are willing to purchase indivisible goods still. The tax rate of indivisible goods is positive. (ii) because high-ability taxpayers hope the tax on indivisible goods could be much lighter, while the low-ability taxpayers hope the tax on indivisible goods could be much heavier. This result reveals the tax rate of indivisible goods in the political equilibrium will be lower than the one in the optimal commodity taxation. As for the social welfare level, it will decline due to the existence of interest groups.
  • Link http://www.econ.sinica.edu.tw/UpFiles/2013090214141704234/Messagess_Flies2013100417174743120/S10819刊登定稿.pdf