October 16, 2015, 11:00–12:30
Room MS 003
This paper proposes a Mirrleesian theory of commodity taxation in the presence of durable goods. Nondurable goods should be taxed uniformly provided that the preferences over nondurable consumption are weakly separable from labor effort. A uniform taxation across all goods is optimal if the utility from durable consumption is linear and the preferences are additively separable between durable goods, nondurable goods and labor effort. If those conditions are not met, wealth effects and substitution effects justify the use of differential commodity taxes. To characterize the sign of the tax differential, the paper exploits a “Substitution Euler Equation” that links the marginal rate of substitution between durable and nondurable consumption across time. Finally, an application of this theory suggests that housing investment should face higher tax rates than nondurable consumption.