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On the Taxation of Durable Goods

Author

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  • Sebastian Koehne
Abstract
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.

Suggested Citation

  • Sebastian Koehne, 2015. "On the Taxation of Durable Goods," CESifo Working Paper Series 5194, CESifo.
    • Handle: RePEc:ces:ceswps:_5194
    as

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    References listed on IDEAS

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    1. Ábrahám, Árpád & Koehne, Sebastian & Pavoni, Nicola, 2011. "On the first-order approach in principal-agent models with hidden borrowing and lending," Journal of Economic Theory, Elsevier, vol. 146(4), pages 1331-1361, July.
    2. Mikhail Golosov & Narayana Kocherlakota & Aleh Tsyvinski, 2003. "Optimal Indirect and Capital Taxation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(3), pages 569-587.
    3. Fernando Alvarez & Luigi Guiso & Francesco Lippi, 2012. "Durable Consumption and Asset Management with Transaction and Observation Costs," American Economic Review, American Economic Association, vol. 102(5), pages 2272-2300, August.
    4. Diamond, P. A. & Mirrlees, J. A., 1978. "A model of social insurance with variable retirement," Journal of Public Economics, Elsevier, vol. 10(3), pages 295-336, December.
    5. Emmanuel Farhi, 2013. "Insurance and Taxation over the Life Cycle," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 80(2), pages 596-635.
    6. Renato Gomes & Jean-Marie Lozachmeur & Alessandro Pavan, 2018. "Differential Taxation and Occupational Choice," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(1), pages 511-557.
    7. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 55-75.
    8. Cremer, Helmuth & Gahvari, Firouz, 1995. "Uncertainty and optimal taxation: In defense of commodity taxes," Journal of Public Economics, Elsevier, vol. 56(2), pages 291-310, February.
    9. Patrick Bajari & Phoebe Chan & Dirk Krueger & Daniel Miller, 2013. "A Dynamic Model Of Housing Demand: Estimation And Policy Implications," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54(2), pages 409-442, May.
    10. Jonathan Eaton & Harvey S. Rosen, 1980. "Optimal Redistributive Taxation and Uncertainty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 95(2), pages 357-364.
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    Citations

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    Cited by:

    1. Spencer Bastani & Sebastian Koehne, 2022. "How Should Consumption Be Taxed?," CESifo Working Paper Series 10038, CESifo.
    2. Sebastian Koehne & Dominik Sachs, 2016. "Pareto-Efficient Tax Breaks," CESifo Working Paper Series 6147, CESifo.
    3. Sebastian Koehne & Dominik Sachs, 2019. "Pareto-efficient Tax Deductions," CESifo Working Paper Series 7744, CESifo.
    4. Lu, Chun-Hui & Ueng, K.L. Glen & Chang, Juin-Jen, 2022. "Consumption indivisibility and the optimal tax mix," Economic Modelling, Elsevier, vol. 112(C).
    5. Koehne, Sebastian & Sachs, Dominik, 2022. "Pareto-improving reforms of tax deductions," European Economic Review, Elsevier, vol. 148(C).
    6. Francesca Parodi, 2023. "Taxation of Consumption and Labor Income: A Quantitative Approach," American Economic Journal: Macroeconomics, American Economic Association, vol. 15(4), pages 177-216, October.
    7. Hellwig, Christian, 2021. "Static and Dynamic Mirrleesian Taxation with Non-separable Preferences: A Unified Approach," TSE Working Papers 21-1224, Toulouse School of Economics (TSE).
    8. Li, Shiyu & Lin, Shuanglin, 2023. "Housing property tax, economic growth, and intergenerational welfare: The case of China," International Review of Economics & Finance, Elsevier, vol. 83(C), pages 233-251.
    9. Spencer Bastani & Daniel Waldenström, 2020. "How Should Capital Be Taxed?," Journal of Economic Surveys, Wiley Blackwell, vol. 34(4), pages 812-846, September.

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    More about this item

    Keywords

    optimal taxation; commodity taxation; durable goods; Atkinson-Stiglitz result; pre-committed goods; housing;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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