Addressing Equity:

Ramsey rule can even contradict equity or social justice as efficiency is the only focus of such a rule. In the 1970s, it was realised that concentrating only on efficiency aspects independent of equity effects would not be meaningful at least with respect to  practical applications in a many person economy. It seems that Ramsey rule requires luxury goods with generally high price  elasticities are to be taxed at lower rates and necessities with low elasticities are to be taxed at higher rates. This way of taxation is inegalitarian as the poor consume more of necessities and less of luxury goods and vice versa for the rich.

Now suppose that the taxpayers differ with regard to their endowments. Apart from being concerned with minimisation of  efficiency cost alone, the question of distribution of consumer welfare assumes importance. But in presence of income taxes, the income tax structure can be so designed so that it can bear the entire burden of distribution. Commodity taxes may therefore  cease to become part of the optimal tax structure (Atkinson and Stiglitz 1976). However, there may be administrative reasons for resorting to indirect taxation.

If variation in the tastes of the consumers are recognised and concern for fairness of the tax system is explicitly taken into  account, a social welfare function is introduced which allows for higher weights for disadvantaged (or poor) households and lower weights for the privileged (or rich) to render the tax system more equitable. The basic problem gets modified in the following  manner. Percentage reduction in goods consumed by the disadvantaged who are favoured by the government is smaller than the percentage reduction in the goods consumed by the households with lower weights in the social welfare function. Equity  considerations are taken into account as higher taxes are imposed on goods, which are predominantly consumed by the rich.