A Comprehensive Analysis of Production Efficiency: A Tax Reform Perspective

Abstract
We investigate how income should be redistributed in economies where taxpayers supply multiple production factors which may be imperfect substitutes. The production sector may exhibit market imperfections and be specifically impacted by some ``production policies'' including the taxation of intermediate goods (e.g., taxing robots and AI), commodity taxation, public production, trade openness (e.g., tariffs), business-focused environmental and financial market regulations, and competition policies. A main insight is that deviation from production efficiency does not depend on the type of production policy, its redistributive consequences, or market failures but rather on the features of the tax system. In particular, it depends on whether or not the tax system can be reformed in some specific directions, that we label ``GE-replicating'', which replicate the effects of factor price adjustments on taxpayers' supplies and utility. If reforms in the GE-replicating directions are admissible, production policies should be designed solely to enhance production possibilities. Moreover, tax incidence formulas and optimal tax formulas are only modified to correct for market imperfections. If reforms in the GE-replicating directions are not admissible, the design of production policies should also take into account their pre-distributive role. Moreover, tax incidence and optimal tax formulas are augmented by GE multipliers which correct for price adjustments. We illustrate these insights with practical examples, including intermediary goods taxation, scenarios of Cournot duopoly, changes in trade regulations, taxing AI and robots and business-focused environmental regulations.