A literature review on optimal indirect taxation and the uniformity debate

Abstract

A review of the theoretical literature on optimal indirect taxation reveals that analytical arguments in favor of uniform indirect taxation seem rather weak and unrealistic; hence determining the optimal tax structure remains an empirical issue. However, reviewing the empirical-computational studies pub¬lished so far, shows that most of them operate under rather restrictive and simplistic frameworks. There is little computational support for uniformity, particularly when the models approach real world com¬plexity. It appears that in a many-consumer economy, differentiated and progressive indirect taxation is likely to be the optimal solution