ON A CORLETT-HAGUE RULE IN AN ECONOMY WITH PURE PROFIT

Abstract

This paper examines the welfare effect of a tax reform policy which diversifies the commodity tax rates in a three good economy with pure profit. If the commodity taxes are uniform initially, it is welfare improving to raise the tax on the commodity whose demand is more complementary with leisure and whose supply is more inelastic to wage. The formula we obtain treats the supply and the demand sides symmetrically. Furthermore, we can show that if the tax reform is welfare improving, then it increases labor supply in the economy, too. If the commodity tax rates are widely diversified, replacing commodity taxes by a wage income tax is welfare improving even in an economy with pure profit.