**2. Optimal taxation**

the matter of obtaining the aforementioned macroeconomic goals reveals that taxation is one of the effective economy policy tools in the hands of the state. In accordance with the social state approach, taxation emerges as a transfer mechanism. Enabling equality/justice for each indi-

Citizens belonging to all income groups in a country to be able to benefit from public services within the context of equality and justice principle on the other hand can only be possible by the state to transfer the resource, which is collected from the higher income group via taxation to lower income groups as public services. Within this framework, taxation is the most

How to design taxes, which are the most important policy tools of the state in reaching the goal of effectiveness and equality, has been comprehensively discussed in the optimal taxation literature. Optimal taxation is a taxation, which reflects the preferences between the society's rivaling aims of equality and economic efficiency and which has maximizing social wealth as

In today's conditions, in which the state has asymmetrical information about the individual's social and economic characteristics, the goal of income redistribution can be possible through the use of distortionary taxes. The state can assure income justice by using distortionary taxes only by conceding economic efficiency. Because of this reason, optimal taxation lays emphasis on tax subject, tax rate, and tax base, which will minimize thrashing in securing a certain

In this context, two main studies exist in the optimal taxation literature with regard to tax subject. In his study, Ramsey [1] approached optimal tax subject on the basis of consumption, and in the second fundamental study, Mirless [2] identified revenue as the tax subject. In both

In the Ramsey approach to optimal taxation, since the needed budget revenue is possible to be obtained only by distortionary taxes under the assumption that it is not possible for governments to resort to lump sum taxes, it will bring along a wealth loss in terms of economic efficiency and will move away from the optimal solution. Within this framework, Ramsey emphasizes on the tax subject and rate that will minimize efficiency loss. In Ramsey approach, it is generally agreed

Optimal commodity taxation, which was proposed in 1927 by Ramsey and whose theoretical structure has developed through today's modern approaches, is based on the inverse elasticity rule, which claims goods with low demand elasticity to be taxed at a higher rate will reduce efficiency loss, and Corlett-Hauge Rule [4], which claims leisure complement goods that will change the preferences of consumers between working and leisure on behalf of working need

In the inverse elasticity rule suggested by Ramsey, all goods are aimed to be affected equally from taxes by levying taxes at a high rate from goods with low demand elasticity and at a low

studies, ideal tax rates were searched within the context of the determined tax subject.

that the government can impose a linear income tax besides commodity tax [3].

vidual is accepted to be at the helm of the duties of states toward their citizens.

important element of the transfer mechanism between income groups.

the starting point.

124 Taxes and Taxation Trends

amount of tax revenue.

to be taxed at a higher rate.

rate from goods with high demand elasticity.

The most fundamental goal of economic and fiscal policies is to maximize wealth. This goal includes quite large sub-goals, such as providing stability, growth, efficient allocation of resources, and fair income distribution. Tax is the primary fiscal tool to be used in reaching the goals in question. Among the tax applications that are under the changing and developing state understanding, what type of taxation is the taxation that serves the goal of wealth maximization is considered in the literature especially in the framework of "Optimal Taxation" theory.

While within classical welfare economics understanding, optimal taxation theory considers taxes as effective tools in assuring resource allocation; new welfare economics' view of utility measurement and impossibility of inter-personal comparisons caused economic area of interest to rotate to Pareto efficiency. This situation focused on substitution effect of taxes, creating efficiency loss and lasted until the study of Mirrlees [2], which targets resolution of equality and efficiency conflict.

In this context, optimal taxation is the taxation that reflects the preferences of the society between equality and efficiency with rivaling goals, and that has social wealth maximization as the starting point. Within this scope, balance between the goals of justice (equality) in taxation and economic efficiency is tried to be redressed. On the other hand, trade-off between these goals created different approaches to the topic.

maximizes social wealth. Optimal taxation theory seeks answers basically to the following

Optimal Taxation of Consumption in the Scope of Changing Elasticities of Demand...

http://dx.doi.org/10.5772/intechopen.74378

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(iv) In the following parts of this study, optimal taxation will be taken on consumption.

The main topic of discussion in the literature regarding optimal commodity taxes, which are approached under the heading of optimal taxation, is about the proportional structure of the taxes in question. In this context, literature searches which tax rates, single rate or varying, will create optimal results in the construction of optimal commodity taxes. Within this scope, while on one side, there is the view arguing that a single rate tax will not damage market forces and will be synonymous with a fixed rate tax on income [14]; on the other side, optimal

Ramsey rule involves taxing commodity and zero capital taxes in the long run [15] for minimizing the deadweight loss. For public choice theory, equilibrium taxes and feasible tax structure apart from Ramsey analysis are important subjects because tax system can cause rent

Optimal commodity taxation, which was proposed in 1927 by Ramsey and whose theoretical structure has developed through today's modern approaches, is based on the inverse elasticity rule, which claims goods with low demand elasticity to be taxed at a higher rate will reduce efficiency loss, and Corlett-Hauge Rule, which claims leisure complement goods that will change the preferences of consumers between working and leisure on behalf of working

As seen in **Figure 1**, tax application may cause a decrease in social wealth by changing price before and after tax. The reason behind this is the decline of production under the amount before tax because of the change in price. Minimization of this efficiency loss, which is also

Under the assumption that characteristics of individuals can only be known deficiently and thus lump-sum taxes are not applicable, Ramsey searched the tax structure that will minimize efficiency loss (deadweight loss) associated to the collection of a specific amount of tax revenue. Excess tax burden is caused by the reduction in equilibrium quantity because individuals change their behaviors and consume taxed product less. Decrease in the quantity of the product depends on demand elasticity. According to Ramsey rule, tax rate imposed on the good with high elasticity should be lower than the tax rate imposed on the good with low elasticity [18]. In this way, as seen in **Figure 1**, decrease in the equilibrium quantity of goods would be minimized.

called excess tax burden or deadweight loss (DWL), is the purpose of the tax systems.

(i) On what will the tax be taken from (income-consumption-wealth)?

(iii) If the tax will be taken on wealth, how will the tax base be? [13]

**4. Optimal commodity taxes: Ramsey rule**

(ii) If the tax will be taken on consumption, is it going to be at a fixed rate?

commodity taxes within the context of Ramsey and varying rates take place.

seeking when it is used as an income distribution tool [16, 17].

need to be taxed at a higher rate.

questions:

Existence of the relevant trade-off depends on the existence and influence of distortionary taxes. In today's conditions, in which the state has asymmetrical information about the individual's social and economic characteristics, the goal of income redistribution can be possible through the use of distortionary taxes. The state can assure income justice by using distortionary taxes only by conceding economic efficiency. Because of this reason, optimal taxation lays emphasis on tax subject, tax rate, and tax base, which will minimize efficiency loss in securing a certain amount of tax revenue.
