Computing Optimal Tolls in a Money Economy

Abstract

A major economic fact of the last fifty years is the increasing importance of the state. In the case of the Canadian economy, the total government budget grew from 10 per cent to 46 per cent of gross national product. Two technical consequences which one cannot over-emphasise stem from this stage of affairs:

• (a) a broader and more complex tax base

• (b) repeated direct and indirect interventions in the marketplace to the point where the state now holds the balance of power on every market.

The first consequence has pushed economists to revise their views on optimal taxation: a modern state cannot limit itself to uniform taxes and lump-sum taxes. Because of the second consequence optimal taxation formulae cannot be derived from partial equilibrium analysis but rather from a generalised Pareto optimum framework.

This research was supported by a Canada Council grant. The authors are indebted to A. P. Barten, R. Boadway, W. E. Diewert, J. H. Drèze, R. B. Lipsey, T. Matuszewski,P. Mieszkowski, A. Sandmo and SITE fellows for their valuable comments. This final ver­sion of our paper has been influenced by the fine presentation by J. Muellbauer at the IEA meeting and by participants’ discussion. The authors are also indebted to many graduate students for their work in many previous experiments. C. Bronsard is mainly responsible for Part I, L. Salvas-Bronsard and D. Delisle for Part II.