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Efficient Public Good Provision with Nonlinear Income Taxation

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  • Thomas Gaube

    (University of Bonn)

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    Abstract

    Due to the use of distortionary taxation, many believe that real-world economies should attain a lower level of public expenditures than one might suspect from the analysis of artificial models where lump-sum taxes are assumed to be available. The paper examines this popular hypothesis by means of the two-type self-selection model of income taxation. I provide sufficient conditions for both a lower and a higher level of public expenditures in second best than in first best. In particular, it is shown that the widely employed assumptions of Christiansen (1981) lead to under-provision of the public good in the income tax optimum.

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    Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 0850.

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    Date of creation: 01 Aug 2000
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    Handle: RePEc:ecm:wc2000:0850

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    1. Fullerton, Don, 1997. "Environmental Levies and Distortionary Taxes: Comment," American Economic Review, American Economic Association, vol. 87(1), pages 245-51, March.
    2. Deaton,Angus & Muellbauer,John, 1980. "Economics and Consumer Behavior," Cambridge Books, Cambridge University Press, number 9780521296762, April.
    3. Blomquist, S. & Christiansen, V., 1995. "Topping Up of Opting Out? The Optimal Design of Public Provision Schemes," Papers 1995-13, Uppsala - Working Paper Series.
    4. Robin Boadway & Michael Keen, 1991. "Public Goods, Self-Selection and Optimal Income Taxation," Working Papers 828, Queen's University, Department of Economics.
    5. Nava, Mario & Schroyen, Fred & Marchand, Maurice, 1996. "Optimal fiscal and public expenditure policy in a two-class economy," Journal of Public Economics, Elsevier, vol. 61(1), pages 119-137, July.
    6. Christiansen, Vidar, 1981. "Evaluation of Public Projects under Optimal Taxation," Review of Economic Studies, Wiley Blackwell, vol. 48(3), pages 447-57, July.
    7. Stiglitz, Joseph E., 1982. "Self-selection and Pareto efficient taxation," Journal of Public Economics, Elsevier, vol. 17(2), pages 213-240, March.
    8. Wilson, John Douglas, 1991. "Optimal Public Good Provision with Limited Lump-Sum Taxation," American Economic Review, American Economic Association, vol. 81(1), pages 153-66, March.
    9. Dagobert L. Brito & Jonathan H. Hamilton & Steven M. Slutsky & Joseph E. Stiglitz, 1990. "Pareto Efficient Tax Structures," NBER Working Papers 3288, National Bureau of Economic Research, Inc.
    10. Stern, Nicholas, 1982. "Optimum taxation with errors in administration," Journal of Public Economics, Elsevier, vol. 17(2), pages 181-211, March.
    11. Gaube, Thomas, . "When Do Distortionary Taxes Reduce the Optimal Supply of Public Goods?," Discussion Paper Serie A 574, University of Bonn, Germany, revised Apr 1999.
    12. Tuomala, Matti, 1990. "Optimal Income Tax and Redistribution," OUP Catalogue, Oxford University Press, number 9780198286059, September.
    13. Brito, Dagobert L, et al, 1990. "Pareto Efficient Tax Structures," Oxford Economic Papers, Oxford University Press, vol. 42(1), pages 61-77, January.
    14. Atkinson, Anthony B & Stern, N H, 1974. "Pigou, Taxation and Public Goods," Review of Economic Studies, Wiley Blackwell, vol. 41(1), pages 119-28, January.
    15. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 55-75.
    16. Douglas Wilson, John, 1991. "Optimal public good provision in the Ramsey tax model : A generalization," Economics Letters, Elsevier, vol. 35(1), pages 57-61, January.
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