tax rates, tc , say. Since all substitution effects are proportional to supernumerary
income, (21) reduces to
|
Ph βh(mh - m(P))tc = t [βav + Cθv(βh, mh - m )]tc = t mav — m(p)) |
(42) (43) |
On the other hand, because the income effects are independent of income,
(23) can be written as βhr(tc) = r(t), where r(∙) denotes the net increase in gov-
ernment revenue from a marginal increase in the lump sum grant to a consumer.
Combining both results gives:
rr(⅛ tc =t (44)
If then r(t) > (<) r(tc) then tc À (≪) t. Because both income effects are
positive, this implies that r(tc) > (<) r(t), a contradiction. Therefore tc = t and
βh =1 (all h).
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