Revisiting the Classical View of Benefit-Based Taxation
AbstractThis paper explores how the persistently popular "classical" logic of benefit based taxation, in which an individual's benefit from public goods is tied to his or her income-earning ability, can be incorporated into modern optimal tax theory. If Lindahl's methods are applied to that view of benefits, first-best optimal policy can be characterized analytically as depending on a few potentially estimable statistics, in particular the coefficient of complementarity between public goods and innate talent. Constrained optimal policy with a Pareto-efficient objective that strikes a balance-controlled by a single parameter-between this principle and the familiar utilitarian criterion can be simulated using conventional constraints and methods. A wide range of optimal policy outcomes can result, including those consistent with existing policies. To the extent that such an objective reflects the mixed normative reasoning behind prevailing policies, this model may offer a useful approach to a positive optimal tax theory.
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Bibliographic InfoPaper provided by Harvard Business School in its series Harvard Business School Working Papers with number 14-101.
Length: 29 pages
Date of creation: Apr 2014
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-04-29 (All new papers)
- NEP-PBE-2014-04-29 (Public Economics)
- NEP-PUB-2014-04-29 (Public Finance)
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