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Development Economics Paper
Commodity Taxation and Social Welfare: The Generalised Ramsey Rule
David Coady and Jean Drèze
September 2000
Paper No' DEDPS 27:
Full Paper (pdf)

Tags: commodity taxation; efficiency; redistribution; shadow prices

Commodity taxes have three distinct roles: (1) revenue collection, (2) interpersonal redistribution, and (3) resource allocation. The paper presents an integrated treatment of these three concerns in a second-best general equilibrium framework, which leads to the 'generalised Ramsey rule' for optimum taxation. We show how many standard results on optimum taxation and tax reform have a straightforward counterpart in this general framework. Using this framework, we also try to clarify the notion of 'deadweight loss' as well as the relation between alternative distributional assumptions and the structure of optimum taxes.