Dictionary of Arguments

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Mause I 272

(pi – MC)/pi ej
________ = __
(pj – MC)/pj ei

Pi = price of the i-th good; MC = marginal good in the markets of the i-th good; ei = Price elasticity of demand for the i-th good.
Thus, for two goods i and j selected from the quantity of all existing goods, the tax rates levied on consumption of i and j will be in inverse proportion to the price elasticities of demand. With relatively low price elasticity, relatively high tax revenues can be achieved without causing major substitution effects (and thus welfare losses). (RamseyVsEdgeworth, see Taxation/Edgeworth, Taxation/Ramsey.
The rule therefore says something about the optimal ratio of tax rates on consumer goods to each other. However, this does not say anything about the amount of the tax. See also economic theories on taxation
Mause I 273
VsRamsey: Problem: if goods with very low price elasticity of demand are, for example, staple foods or drinking water, the Ramsey Rule can quickly have undesirable, strongly regressive distribution effects. The tax system would place a disproportionate burden on relatively poor households.
Solution/DiamondVsRamsey/MirrleesVsRamsey: those goods that are heavily consumed by individuals whose welfare still has a strongly positive marginal effect on social welfare should be taxed less. (1)(2)
This integrates the weighing of pure efficiency goals and ideas of distributive justice.

1. Peter A. Diamond und James Mirrlees. 1971. Optimal taxation and public production I/ II. American Economic Review 61( 1): 8– 27 und 61( 3): 261– 278.
2. Peter A. Diamond, 1975. A many person Ramsey tax rule. Journal of Public Economics 4 (4). S. 335– 342.

Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution.
The note [Author1]Vs[Author2] or [Author]Vs[term] is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition.

Ramsey I
F. P. Ramsey
The Foundations of Mathematics and Other Logical Essays 2013

Ramsey II
Frank P. Ramsey
A contribution to the theory of taxation 1927

Ramsey III
Frank P. Ramsey
"The Nature of Truth", Episteme 16 (1991) pp. 6-16
Theories of Truth, Paul Horwich, Aldershot 1994

Mause I
Karsten Mause
Christian Müller
Klaus Schubert,
Politik und Wirtschaft: Ein integratives Kompendium Wiesbaden 2018

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