Some Equity in Tax Collections of the Government in a Commodity Market

Year 2017, Volume: 1 Issue: 1, 127 - 154, 01.06.2017

Ahmet Özçam

Abstract

The Laffer effect has been discussed before in context
of macroeconomic endogenous
growth models or in labor market. Discussion have been mainly about whether a tax cut on wages would induce workers to spend
more time on work rather than leisure
and at the same time leading to an
increase in income tax revenues
of the government. In this paper, we are
interested in providing a general formula for the revenue-maximizing government using an ad valorem tax rate in a single
(micro) commodity market such as automobiles, liquor or cigarettes in the case of non-linear demand and supply curves. It
turns out that the optimal commodity tax rate depends on the after-tax demand
elasticity. Therefore, in practice the government officials should try to project the after-tax elasticity and not rely on the before-tax elasticity, which is commonly
assumed in the economics literature. More importantly, if the government
imposes an ad valorem tax on a product in a micro market, then the consumers’
share of burden of tax does not change no matter what the tax rate is. Hence,
in that sense, we find some equity in taxing. Some additional important
theoretical results are derived when the demand and supply curves have
different positions.

Keywords

Laffer effect, a commodity market, optimal ad valorem tax rate, non-linear model, consumers’ share of burden of tax

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