Optimal Taxation with Durable Goods

Durable goods have interesting economic features which warrant research in various fields of modern economics. This paper examines optimal taxation with durable consumption goods under uncertainty. We show that a stochastic economy should levy a heavier tax rate on durables than the tax rate on nondurables given that durables function as an insurance which helps consumption smoothing. This means that the social planner needs to discourage the excessive hoarding of durables in view of social welfare. This inference can be buttressed by our finding that the uniform tax rule still preserves in a deterministic economy. A notable finding is that the non-uniform commodity tax rule is derived under perfect credit markets. This suggests that the non-uniformity stems from the unique feature of durables that generates a persistent utility flow regardless of random shocks, which capital does not have. Due to this independent role of durables that reduces the utility gap between good and bad states, the positive effect of the intratemporal tax wedge between nondurables and durables should balance its distortionary effect at the optimum.