'Pakistan Institute of Development Economics (PIDE)'
Doi
Abstract
The theory of optimal taxation has tended to recast the
existing literature of public finance into the mould of classical
welfare economics by emphasising minimisation of dead weight losses
resulting from the imposition of a tax or faulty tax structure. As such,
these modern theories have much in common with the traditional approach
in terms of efficiency and equity. In spite of this, however, the
differences remain. For example, the former theories adhere strictly to
the norms of classical welfare economics which treats individual
consumers as utility maximisers where improvements in welfare involve
change that makes one individual better-off without making someone else
worse-off [Stern (1987)]. In contrast to the emphasis of traditional
theories on lump-sum taxes, the optimum tax literature is concerned with
the implication of using non-lump-sum taxes which have a wider range and
therefore more useful to the policy-maker. The recent work on normative
tax theory looks at the impact of taxation on individual decisions and
the trade off between raising revenues or redistributing tax burdens and
the efficiency losses [Atkinson (1987)]. Finally, the optimal tax
literature may be more pragmatic in its approach than traditional works
as it realistically deals with government objectives and constraints and
combines them into models that are sufficiently rich to allow for
differences between people regarding income and expenditure
patterns