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Describe the Ramsey rule for optimal commodity taxation. Discuss potential equity issues that may arise from...

Describe the Ramsey rule for optimal commodity taxation. Discuss potential equity issues that may arise from the use of this rule.

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The optimal commodity taxation rule of Ramsey, based on rule of inverse elasticity. Optimal taxation rule by Ramsey stood for maximum social welfare with subject constraints.The efficient taxation rule reduces or minimize the losses occurred through excess burden of taxation system.The goods with higher elasticities should have lower tax rates.

But the actual situation seems contrary to the aim of achieving efficiency. For examples, high taxes on basic necessities like food, housing etc. Also lower tax rates on jewellery, designer clothes. Thus the poor people taxed higher than others.

The Ramsey equity problem lies in the fact that Lower taxes levied on rich peoples.

Rahul Sunny answered 2 years ago
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