This chapter shows how formal optimal tax analysis models can be extended to cover all social costs and multiple tax instruments. The key insight is that, at an optimum, for all tax policy instruments not constrained by a corner solution the marginal welfare loss per dollar of revenue raised must be the same. This analysis is then extended to allow for heterogeneous taxpayers. It concludes by discussing the difficulty of integrating the intuitively appealing notion of horizontal equity—the equal treatment of equals—into a formal optimal tax analysis.
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