<abstract xmlns="http://www.w3.org/1999/xhtml">

<p>The present paper attempts to demonstrate that finding an appropriate trade-off between direct and indirect taxes can help smooth policy makers’ way through reconciling the contradictory notions of equity and efficiency. Our theoretical and empirical analysis is based on the assumption that direct taxes discourage work effort, thus impinging on the incentives to supply labour, to save and to invest, and finally, to grow, whereas indirect taxes discourage consumption and bear more heavily on the poor. Central to our discussion is the argument that carefully designed adjustments in the tax mix can reduce distortions in the consumption-leisure decision, thus leading to an optimal allocation of resources between the equity and efficiency objectives. To derive a competitive equilibrium setting, a social welfare function is maximized and the first-order conditions are manipulated to trace out the optimal direct-indirect tax rates that pave the way for the equity-efficiency goals to be reconciled with each other.</p>
</abstract>

The present paper attempts to demonstrate that finding an appropriate trade-off between direct and indirect taxes can help smooth policy makers’ way through reconciling the contradictory notions of equity and efficiency. Our theoretical and empirical analysis is based on the assumption that direct taxes discourage work effort, thus impinging on the incentives to supply labour, to save and to invest, and finally, to grow, whereas indirect taxes discourage consumption and bear more heavily on the poor. Central to our discussion is the argument that carefully designed adjustments in the tax mix can reduce distortions in the consumption-leisure decision, thus leading to an optimal allocation of resources between the equity and efficiency objectives. To derive a competitive equilibrium setting, a social welfare function is maximized and the first-order conditions are manipulated to trace out the optimal direct-indirect tax rates that pave the way for the equity-efficiency goals to be reconciled with each other.

Equity-efficiency dilemma and tax harmonization

National and Kapodistrian University of Athens

Central European Economic Journal

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

{"article-title":"Equity-efficiency dilemma and tax harmonization"}

The present paper attempts to demonstrate that finding an appropriate trade-off between direct and indirect taxes can help smooth policy makers’ way through...

A. Consumption function (ln C)
Variable	Coefficient	t-stat	Probability
constant	4.24	10.30	0.00
lnt_i (a₁)	−0.49	−13.10	0.00
lncom	0.82	40.20	0.00
Adj. R²=0.99, J-stat=2.93E-17

A. $k {\bar{τ}}_{y}^{1 + b_{1} - a_{1}} + {\bar{τ}}_{y} = \bar{τ}$ \boldsymbol{k\bar \tau}_\boldsymbol{y}^{\boldsymbol{1 +}{\boldsymbol{b}_\boldsymbol{1}}\boldsymbol{-}{\boldsymbol{a}_\boldsymbol{1}}}\boldsymbol{+}{\boldsymbol{\bar \tau}_\boldsymbol{y}} = \boldsymbol{\bar \tau}		optimal ${\bar{τ}}_{y}$ {\boldsymbol{\bar \tau}_\boldsymbol{y}}
1.67τ _y^2.98+τ _y=0.506		0.40
B. actual (average) ${\bar{τ}}_{y}$ {\boldsymbol{\bar \tau}_\boldsymbol{y}}	actual (average) ${\bar{τ}}_{i}$ {\boldsymbol{\bar \tau}_\boldsymbol{i}}	optimal ${\bar{τ}}_{y}$ {\boldsymbol{\bar \tau}_\boldsymbol{y}}	optimal ${\bar{τ}}_{i}$ {\boldsymbol{\bar \tau}_\boldsymbol{i}}
0.32	0.19	0.40	0.11

Equity-efficiency dilemma and tax harmonization

Data publikacji: 31 gru 2022

Zakres stron: 342 - 353

DOI: https://doi.org/10.2478/ceej-2022-0020

Słowa kluczowe
equity-efficiency trade off, direct-indirect tax rates, growth, income distribution, tax harmonization

© 2022 Basil Dalamagas et al., published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

Figure 1

Estimates of consumption and labour supply functions

Optimal vis-à-vis actual tax rates

Equity-efficiency dilemma and tax harmonization

Data publikacji: 31 gru 2022

Zakres stron: 342 - 353

DOI: https://doi.org/10.2478/ceej-2022-0020

Słowa kluczoweequity-efficiency trade off, direct-indirect tax rates, growth, income distribution, tax harmonization

© 2022 Basil Dalamagas et al., published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

Figure 1

Estimates of consumption and labour supply functions

Optimal vis-à-vis actual tax rates

Słowa kluczowe
equity-efficiency trade off, direct-indirect tax rates, growth, income distribution, tax harmonization