ON DIRECTIONS OF COMMODITY TAX-REFORM IN THE PRESENCE OF A GIVEN NONLINEAR INCOME-TAX SCHEDULE

This paper analyses directions of commodity tax reform in the presence of a given, possibly non-linear income tax schedule. Two prominent policy prescriptions are re-examined. First, the welfare effect of a proportional reduction of all commodity price distortions turns out to be sensitive to non-linearity. Secondly, the welfare implications of tax changes based on substitutability or complementarity between labour and commodities remain valid in the presence of non-linearity. Within the scope of the model we also discuss the question raised in the classic of Corlett and Hague (1953): Which commodity taxes should supplement the income tax?