This paper proposes a theory of commodity taxation in the presence of durable goods. Optimal commodity taxes depend on preference nonseparabilities between durable and nondurable consumption. In particular, the seminal AtkinsonStigliz result fails and differential commodity taxes are optimal even when the utility function is separable between labor and consumption. An application to housing decisions implies that housing should face higher tax rates than nondurable consumption. Moreover, the theory justifies housing provisions in the income tax code.
optimal taxation commodity taxation durable goods pre-committed goods Atkinson-Stiglitz result