Choosing Taxes with a Constant Elasticity of Substitution (CES) Utility Function
Choosing Taxes with a Constant Elasticity of Substitution (CES) Utility Function
Move the slider labeled "tax rate" to the right to see the effect of a per unit tax on good . The per unit tax makes the budget line steeper and is equivalent to an increase in the price of . Compare the per unit tax to a lump sum tax by dragging the slider labeled "income tax" until the budget line passes through the new equilibrium point. Due to the convexity of the indifference curves (i.e., diminishing marginal rate of substitution), the lump sum tax is superior to the per unit tax, in the sense that the lump sum tax can raise the same amount of tax revenue as the per unit tax, but will leave the consumer better off (i.e., on a higher indifference curve).
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