Abstract:
The paper provides an intuitive explanation seen from an efficiency point of view of the optimal commodity tax structure as the result of a trade-off between two objectives: 1) the objective of maintaining the first-best pattern of consumption of produced commodities, and 2) the objective of not discouraging the supply of labour. It supports this insight using a utility function with the explicit representation of the use of time, and using a functional form based on this utility function, which has sufficient flexibility not to predetermine the outcome of tax simulations, contrary to commonly employed functional forms which impose separability between consumption and leisure. The paper supplements the work of Atkinson and Stern (1980, 1981) by generalising the parameterised functional form they consider, and by pointing out the optimal tax implication of their analysis. It supplements the work by Sandmo (1990) and others by applying standard results to the analysis of optimal taxation with home production, facilitating the derivation of results and their interpretation, and thus helping to clarify certain conceptual ambiguities.
