Scandinavian Working Papers in Economics

Working Papers in Economics,
University of Bergen, Department of Economics

No 05/04: Optimal taxation and normalisations

Bjørn Sandvik ()
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Bjørn Sandvik: University of Bergen, Department of Economics, Postal: Hermann Fossgt. 6, N-5007 Bergen, Norway

Abstract: There still seems to be some confusion about the consequences of normalisations in the optimal taxation litterature. We claim that: 1) Normalisations do not matter for the real solution of optimal taxation problem. 2) Normalisations do matter for good characterisations of the solutions to optimal taxation problems. Whereas the first point is uncontroversial, the second one is less well understood. By postponing the normalisation of consumer prices, we detail how normalisations of consumer prices affect the characterisation of optimal commodity taxes, derive the preferred characterisation, and show how it depends on the normalisation.

Keywords: Optimal taxation; normalisation; marginal cost of public funds.

JEL-codes: H21

14 pages, June 6, 2004

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