ON THE TAXATION OF DURABLE GOODS

This article proposes a dynamic Mirrleesian theory of commodity taxation in the presence of durable goods. A uniform taxation across all goods is suboptimal even when the consumption preferences are separable from labor. If the consumption utility function is strictly concave and durable stocks are adjustable without friction, durable investment should be taxed at a higher rate than the purchase of nondurable goods. With adjustment frictions, the wedge on durable investment depends on substitution effects between durable and nondurable consumption and can be positive or negative. An application suggests that housing investment should face higher tax rates than regular consumption.