Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/176910 
Year of Publication: 
2018
Series/Report no.: 
CESifo Working Paper No. 6891
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
We study optimal income and commodity tax policy with credit-constrained low-income households. Workers are assumed to receive an even ow of income during the tax year, but make tax payments or receive transfers at the end of the year. They use their disposable income to purchase multiple commodities over the year. We show that differentiated subsidies on commodities can be optimal even if the Atkinson-Stiglitz Theorem conditions apply. When the optimal policy leaves low-income households with binding credit constraints, it is optimal to subsidize the good that is consumed in higher proportion by them. We show that this involves subsidizing more goods that fulfill basic needs, such as food or dwelling. The benefits of such subsidies have to be balanced with the costs of financing them, since unconstrained households also benefit from the rebate early in the fiscal year.
Subjects: 
commodity taxation
optimal taxation
credit constraints
Document Type: 
Working Paper
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