Substitutions Among Taxes: Implications For Welfare Loss

The third main question of distorting taxation is that of tax reform: What is the implication on social welfare of substituting one set of taxes for another while holding revenue constant? This tax substitution experiment is perhaps the most compelling of all second-best exercises within the pure allocational theory of taxation, if only because governments occasionally engage in such tax substitutions. We continue to assume a one-consumer-equivalent economy with linear technology.
As long as the tax changes are “small,” the expressions for marginal loss and total tax revenue are all that are needed to determine the efficiency implications for any given equal-revenue substitution among taxes. ...

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