A Characteristics Approach to Optimal Taxation: Line Drawing and Tax‐Driven Product Innovation |
| |
| Authors: | Christian Gillitzer Henrik Jacobsen Kleven Joel Slemrod |
| |
| Affiliation: | 1. Reserve Bank of Australia, Sydney, NSW, Australia;2. London School of Economics and Political Science, London, UK;3. University of Michigan, Ann Arbor, MI, USA |
| |
| 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. |
| |
| Keywords: | Notches tax design H21 |
|
|
