Ramsey taxation

Ramsey taxation, based on the principles proposed by economist Frank Ramsey, suggests that taxes on goods and services should be shaped to minimize economic distortions. It proposes taxing items with inelastic demand—those people will buy regardless of price—more heavily, since higher taxes won’t greatly reduce their consumption. Conversely, items with elastic demand—where consumption drops significantly when prices rise—should be taxed less to avoid discouraging use or causing economic inefficiency. This approach aims to generate revenue efficiently while minimizing negative impacts on economic behavior and overall welfare.