Frank Ramsey

Frank Ramsey (1903–1930)

Frank Ramsey formally studied mathematics but diversified into philosophy and economics. Among economists he is famous for proving that if the tax system is to raise a given revenue with minimum deadweight, each commodity should be taxed in inverse proportion to its price-elasticity of demand (Ramsey, 1927). That is unfortunate because the cited paper does not contain any such result….

Here is Ramsey’s original statement (Ramsey, 1927, p.56):

For infinitesimal taxes … the tax ad valorem on each commodity should be proportional to the sum of the reciprocals of its supply and demand elasticities.

Then, in case the implication is not sufficiently clear, Ramsey spells it out (pp.56–7):

If any one commodity is absolutely inelastic, either for supply or for demand, the whole of the revenue should be collected off it. This is independently obvious, for taxing such a commodity does not diminish utility at all. If there are several such commodities the whole revenue should be collected off them, it does not matter in what proportions.

While there is no commodity for which the demand is absolutely inelastic, there is one obvious commodity for which the supply is absolutely inelastic, namely land….

As we shall see, Ramsey not only formulated a rule that leads directly to a “single tax” on land, but also anticipated the so-called Laffer curve in cases where the “single tax” is not employed. Moreover, Ramsey’s rule was to be applied after any externalities had been internalized by means of appropriate taxes and bounties.

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Read the full article: “Ramsey and Pigou: crypto-Georgists” (LVRG).