This paper attempts to provide conclusive evidence in favor of sensitivity of optimal commodity taxes to demographic variables. This involves estimating optimal commodity taxes for the chosen 16 Indian states, incorporating demographic profiles for each state using NSS data. Such calculations are further done under alternative welfare weights for each household. The results reveal that the introduction of demographic variables in the demand system makes the tax rates more non-uniform across commodities and across states, and significantly alters their response to changes in the social planner's perception of a household's welfare. These effects are more pronounced for certain commodities that are basic and essential in a household's basket. Differences in welfare weights also have a similar effect on tax rates, though to a lesser degree.
A. Seth, Ankur Bhatnagar
The Singapore Economic Review