Optimal Commodity Taxation with Imperfect Competition

This paper derives optimal commodity tax rules for general equilibrium models with imperfect competition. This is achieved by constructing functions for each imperfectly competitive industry describing the effect of taxation upon prices and profits, the construction is applicable to most forms of imperfect competition. Intermediate goods prices appear as important determinants of tax rates and it is shown that the implication of the Diamond-Mirrlees theorem, that intermediate goods remain untaxed, is inapplicable when the competitive assumption is relaxed.