The analysis takes as its point of departure a continuum of consumers economy in which an optimum income tax exists and is the only tax instrument in operation.The welfare effects of introducing small excise taxes to supplement the income tax are then explored. Essential in this context are changes in the tax distortions of work incentives. It is shown that a commodity should be taxed or subsidized depending on whether it is positively or negatively related to leisure in a sense which is precisely defined. The results are related to earlier contributions to the literature on direct versus indirect taxation.

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