Public Goods, Self-Selection and Optimal Income Taxation

Abstract

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. This content downloaded from 128.235.251.160 on TueUsing the self-selection approach to tax analysis, this paper derives a modified Samuelson Rule for the provision of public goods when the government deploys an optimal nonlinear income tax. This approach gives a straightforward interpretation of the central result in this area, generalises it, and provides a simple characterisation of optimal policy in a wide range of circumstances. The analysis also emphasises and clarifies the significance of the choice of numeraire for the optimality of "decentralising" public spending decisions. * Manuscript

The marginal cost of public funds is one at the optimal tax system

“…Consumption and leisure are both assumed to be normal goods. This paper allows for preference 7 It is based on earlier contributions by Ramsey (1927), Mirrlees (1971), Diamond and Mirrlees (1971), Sheshinski (1972), Diamond (1975), Christiansen (1981), Boadway and Keen (1993), Kaplow (1996) and Sandmo (1998). 8 Jacobs (2010) analyzes the model in general-equilibrium settings allowing for a representative firm operating a constant returns-to-scale technology and none of the results change.…”

“…Only in that special case one can unambiguously conclude that the marginal cost of public funds 4 Some authors have allowed for heterogeneous agents, see, for example, the contributions by Browning and Johnson (1984) and Allgood and Snow (1998), but these studies focus mainly on the efficiency costs of taxation. Others have explicitly introduced distributional aspects of public goods and taxes, see, e.g., Christiansen (1981), Boadway and Keen (1993), Kaplow (1996), Sandmo (1998), Slemrod and Yitzhaki (2001), and Dahlby (2008).…”

Optimal Nonlinear Redistributive Taxation and Public Good Provision in an Economy with Veblen Effects

“…3 Despite the fact that Veblen's view of social preferences was soon eclipsed by the simpler neoclassical theory of consumer behavior, his basic insight has later been reformulated in distinct ways to capture the idea that one's well-being is determined not only by the intrinsic utility of own material consumption, but also by one's relative standing in the society or in his peer group. 4 Among the most concerted e¤ort to incorporate relative preferences into mainstream consumer theory, Duesenberry's (1949) relative income hypothesis contends that, when one person increases his income, he imposes utility losses on others. However, as suggested by Runciman (1966), the evidence seems to be that people are mainly bothered about the income of those close to them in the earning distribution and do not su¤er greatly from the riches of the rich (or of the poor), unless they happen to be nearly rich (poor) themselves.…”

Optimal democratic mechanisms for taxation and public good provision

“…3 Our model of taxation is a simple version of an optimal nonlinear income tax system that is due to Weymark (1987Weymark ( , 1986. Our work is also related to a literature that analyzes public goods under the assumption that a distortionary tax system is used to cover the costs; see, for example, Atkinson and Stern (1974), Boadway andKeen (1993), or Gahvari (2006). This literature, however, is based on a complete information environment in which the distribution of public goods preferences is common knowledge.…”