A Pareto-improving commodity tax reform under a smooth nonlinear income tax

The welfare effect of commodity tax reform in economies with nonlinear income taxes is studied. Results show that a tax reform program may be developed to improve the Pareto principle on consumer utility if economic efficiency loss is not minimized due to incentive compatibility. A proposed tax reform policy may be applied to a diversified economic class that has arbitrary smooth income taxes. The analytical process is enhanced via the expenditure function approach. The role of commodity taxation in mixed economies and past studies on optimal tax and tax reform theory are discussed.