Yet another reason to tax goods

Abstract

When, in a dynamic model, choices by an agent : i) are not observed, and; ii) affect preferences conditional on the realization of types, new and unexpected features come up in Mirrlees' (1971) optimal taxation framework. In the simplest possible model where a non-trivial filtration may be incorporated, we show how these two characteristics make it necessary for IC constraints to be defined in terms of strategies rather than pure announcements. Tax prescriptions are derived, and we are able to show that uniform taxation prescription of Atkinson and Stiglitz fails to hold, in general. Clean results regarding capital income taxation are not easy to come about because usual assumption on preferences do not allow for determining which constraints bind at the optimum. However, in the most 'natural' cases, we show that return on capital ought to be taxed.

In-kind transfers and home production

“…As in-kind welfare benefits subsidize the goods that are provided in-kind, the analysis of in-kind welfare benefits in a Mirleesian setting is also intimately related to the redundancy of differential commodity taxation discussed in Atkinson and Stiglitz ( 1976 ) and the literature that follows their work and seeks to establish conditions on preferences and technology when this result holds (see, e.g. Bastani et al 2015 , da Costa 2009 , Gahvari and Micheletto 2016 , Golosov et al 2003 , and Kaplow 2006 ). The use of home production as a justification for differential commodity taxation is novel.…”

The risk properties of human capital and the design of government policies

“…Contrary to the competitive equilibrium where the uncertainty on the returns of education leads to a level of investment in human capital formation that is generally non-optimal from an aggregate perspective, here, the level chosen by the government equates aggregate marginal costs and benefits of education. 7…”