Marginal commodity tax reforms: a survey

As noted 30 years ago by Martin Feldstein, optimal taxes may be useless for practical purposes and emphasis should instead be placed on the possibility of enhancing welfare by reforming existing tax rates. In this perspective, marginal commodity tax reforms are gaining increasing attention due to political and economic constraints on large reforms of direct (or indirect) taxation. In this paper, we summarize the main features and results of the literature on marginal commodity tax reforms pioneered by Ahmad and Stern, further developed by Yitzhaki and Thirsk and recently reinterpreted by Makdissi and Wodon. We establish new links to other fields of research, namely the literature on the use of equivalence scales and on poverty measurement. We also critically examine some issues associated with the implementation of marginal tax reforms with special reference to the calculation of welfare weights and revenue effects. Finally, we suggest directions for future research on poverty-reducing commodity tax reforms.