Demographically Extended & State Specific Optimal Commodity Taxes for India

Abstract

This paper attempts to provide conclusive evidence of regional variations in demand be¬haviour in India using the Restricted Non Linear Preference System. Also the importance of household composition is brought out clearly via its influence on optimal commodity taxes for India. This is done by recognizing each of the chosen 16 Indian states separately and esti¬mating tax rates for them, while incorporating demographic variables. The results show con¬siderable variations in not only the estimated tax rates, but also in the demand behaviour as revealed by response of tax rates to changes in revenue requirements and changes in a social planner's aversion to inequality. In other words, the estimated tax rates are extremely sensi¬tive to the degree of aversion to inequality and the required revenue; the response of each state to these changing parameters is also non uniform. Our results reveal that indirect taxes are ineffective in redistributing income in the majority of the states under consideration.