Abstract: In a dual economy with a continuum of endogenous wages, we provide both optimal income tax and commodity tax formulas with sufficient statistics. We treat the sector with higher income and lower substitution elasticity between labor factors as urban areas, while the other one as rural areas. We find that both commodity and income tax depend on wage elasticities with respect to labor inputs. Higher commodity tax rate should be levied on the goods produced by high-ability individual relative intensive sector, which in turn makes income tax flatter. Considering endogenous wages, labor mobility and commodity taxes, we generalize the standard optimal income tax formula. The numerical simulation is based on a survey data on urban and rural household income in China in 2007 and 2013. We find that urban commodity tax is always higher than rural commodity tax, while the difference is relatively smaller in 2013. Besides, given the substitution elasticity between labor factors in urban areas, the difference between the commodity tax rates of urban and rural areas are increasing with the decrease of substitution elasticity in rural area.