Optimal taxation is the taxation that reflects society’s choices between the rival goals of equality and economic efficiency, the starting point of which is to maximize social welfare. The optimal taxation of commodity that was launched by Ramsey is based on the rule of inverse elasticity, which holds that the taxation of goods with low elasticities of demand at a higher rate will reduce the loss of efficiency. The criticism of this rule is due to the fact that essential goods to meet basic needs have low price elasticity of demand, while luxury goods have high price elasticity. Under the assumption that consumers are similar, it is argued that the taxation of luxury goods at a lower rate than necessity goods will have a negative effect on tax justice. Changing market conditions thus change the elasticity of demand for luxury goods and necessity goods, and such change makes it necessary to reconsider the basic assumptions of optimal taxation and the criticisms directed at optimal taxation. In this context, the present study will investigate differing elasticities of demand in connection with changing market conditions in the scope of the liberalization of trade. In the light of these investigations, optimal commodity taxes will be reassessed.
Part of the book: Taxes and Taxation Trends