A Critique of Optimal taxation

• Stiglitz (1988), Ricketts (1981) and Tollison (1987)

• Ethical problems:– Focus of Optimal taxation on equity; ends– Justice requires to look at rules and processes too– Optimal tax regimes might conflict with views of

liberals

• Welfare Problems: – Utility a function of goods consumed and leisure

time consumed; is it a true proxy of happiness?? Is it not narrow??

– Scitovsky (1976); comfort…Pleasure…– Hirsch (1977) and Goodin (1989), positional goods

• General equilibrium problems:– Increase in taxes caused wage demand increases– Overtime, there is likely to be adjustment to taxes

that under current arrangements appear optimal

• Administrative problems:– Calculation requires knowledge of utility,

distribution of skill levels, etc…practical problems– Cost of administration, have a bearing on choice

of tax and tax rates, not incorporated– Compliance costs- equity consideration– Access to tax advise and tax avoidance-not same

for all

• Political problems: – Simplicity of tax; informed and better choice in

political process– Less visible, but strong influence

• Rent seeking problems: – Losses in taxation are inadequately captured in welfare

triangle losses; efficiency loss– Figure 15.11– Producers, a small group, strong vested interest, politically

mobile; they will spend resources for the purpose of “ rent protection” and this process reflects a real resource loss

– Tollison remarks, such additional welfare costs need to be considered

– Taxing on inelastic goods as suggested may not work in this case

• Elasticity of substitution and nature of SWF pursued affects the analysis/model

• Assumptions, convenient hypothesis• Attempts to understand the best model

currently available rather than prescription for policy