Alternative interpretation of Ramsey rule:

There is an alternative interpretation of Ramsey rule. In a three good economy, efficiency implications are studied in which labour (or leisure) enters the utility function as a third argument. In presence of leisure, commodity taxes make commodities dearer and leisure cheaper. What the optimal tax theory (Corlett and Hague 1953) does is to take advantage of substitutability and complementarity between commodities and leisure and proposes that optimal tax rates on different goods should depend upon the demand for the goods and its relationship with leisure. Those which are complementary to leisure such as watching movies should be taxed at higher rates and those which are substitutable (but complementary to labour) such as, uniform (or attire) or other work related expenses should be taxed at lower rates. This is how untaxed leisure gets taxed in an indirect manner.