Corlett-Hague rule

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The Corlett-Hague Rule is a tenet of optimal taxation theory that follows the "second best" approach. It is derived from the Ramsey rule and states that optimal taxation can be achieved when complementary goods are taxed on leisure time.

Explanation

If consumption is taxed with a consumption tax, there is a decrease in the consumption of these goods. Cross-price elasticities that differ from zero then lead to a loss of welfare , since more leisure time tends to be consumed. This consideration follows the substitution effect in favor of leisure time, which results from both a taxation of consumption and a taxation of income from work.

A "first-best" solution in the sense of efficient taxation would tax this consumption of leisure time directly and thus compensate for the loss of welfare. However, it is not possible to tax leisure time, so only a "second best" solution is possible. This is achieved by taxing (actually taxable) goods that are consumed in leisure time. The cost of leisure time is therefore tending to be higher and the demand for - more expensive - leisure time is falling.

Actual application

The Corlett-Hague rule was used in the Canadian province of Ontario . While the share of sales tax levied at provincial level was generally seven percent, the tax rate for meals consumed in restaurants was ten percent. This followed the logic that dining out is an activity that often takes place in leisure time.

With data for the United States, West and Williams (2007) show that the (second best) optimal tax rate for gasoline is influenced by the cross-price elasticity of labor demand. Since fuel is complementary to leisure time compared to other goods, it should be taxed relatively higher. In addition to air pollution, this is a second reason for higher taxation on fuel. According to the study's authors, there is scope in the United States to apply the Corlett-Hague rule on this basis.

Web links

Individual evidence

  • WJ Corlett and DC Hague (1953): "Complementarity and the Excess Burden of Taxation", Review of Economic Studies 21, 21-30.
  • Rosen, Dahlby, Smith, Boothe, Public Finance in Canada , Second Canadian Edition, Toronto 2003, p. 340 there
  • West, SE, & Williams, RC (2007). Optimal taxation and cross-price effects on labor supply: estimates of the optimal gas tax. Journal of public Economics, 91 (3), 593–617.