Re-examination of uniform commodity taxes under a non-linear income tax system and its implication for production efficiency

Abstract

This paper shows that the result of “uniform commodity tax under nonlinear income taxation” by Atkinson and Stiglitz (1976) no longer holds if the production side of an economy is taken into the consideration. In particular, imposing a non-uniform commodity tax can Pareto-improve welfare even under nonlinear income taxation. In addition, the paper shows that if the government uses a nonlinear income tax system for income redistribution, then the introduction of distortions in the public sector can Pareto-improve welfare, contrary to the results in Diamond and Mirrlees (1971).