A simple procedure for calculating optimal commodity taxes, is proposed which takes into account the simultaneous interdependence of taxes, expenditure and price levels/responses. The method also allows for the social marginal utility of income to depend on prices, besides expenditures, in a manner implied by the assumed preference functional form. Illustrative calculations on Indian budget data provide evidence not only in favour of the procedure, but of considerable sensitivity of directions of marginal tax reforms to the data set (rural or urban) used, and of optimal tax estimates to demand functional form.
Maddipati Narsimha Murty and Ray, R., “A Computational Procedure for Calculating Optimal Commodity Taxes with Illustrative Evidence from Indian Budget Data”, The Scandinavian Journal of Economics, vol. 91, pp. 655–670, 1989.