Corlett-Hague rule

The Corlett -Hague rule is a theorem of the theory of optimal taxation, the " second-best " solution approach follows. It arises as a derivation from the Ramsey rule and states that optimal taxation is to be achieved when complementary goods of leisure are taxed.

Explanation

If consumption taxes with a consumption tax, so there is a fall in the consumption of these goods. Non-zero cross-price elasticities lead to a welfare loss, as tended to have more leisure is consumed. This consideration follows the substitution effect in favor of leisure, the results both from a taxing consumption as well as from taxation of labor income.

A " first-best " solution in the sense of efficient taxation would tax this consumption of leisure immediately and so compensate for the welfare loss. However, it is not possible to tax leisure, therefore, only there is a " second-best " solution in question. This is achieved by ( actually taxable ) goods are taxed, which are consumed at leisure. The cost of leisure will therefore tend to be higher, the demand for - claims inflation - Leisure goes back.

Enforceability

The Corlett -Hague rule was applied in the Canadian province of Ontario. While the share levied at the level of provincial sales tax generally amounted to seven percent, the tax rate for food consumed in restaurants was ten percent. This followed the logic that restaurant visits represent activities that often take place during leisure time.