An Argument on Using the Optimal Tax Theory to Direct Tax Reform

The optimal tax theory holds that goods that lack flexibility in demand should be imposed more taxes in order to reduce additional burdens of tax income. But if these goods are consumed by low-incomers, then the tax should be imposed at a lower rate. This theory also holds that the optimal marginal tax rate for highest income consumers should be zero. These conclusions will hold true only under strict presumptions. Therefore, we cannot simply take some of these conclusions as universal principles in tax reform. Chinese tax reform must be carried out with more considerations of its national situation.