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); comfortPleasure
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, etcpractical
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 avoidancenot 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