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Optimal Income Taxation, Public Goods Provision and Robust Mechanism Design

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  • Felix Bierbrauer

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    (Max Planck Institute for Research on Collective Goods, Bonn)

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    Abstract

    This paper extends the model of optimal income taxation due to Mirrlees (1971) and includes private information on public goods preferences. A mechanism design approach is used to establish the following result: If policies are required to be robustly implementable in the sense of Bergemann and Morris (2005), then the optimality conditions in the extended model with uncertainty about tax and expenditure policies, are the same as in the standard model of optimal income taxation. The paper provides a foundation for a widely used assumption in public nance, namely that individuals optimize their behaviour subject to a predetermined and commonly known tax system.

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    Bibliographic Info

    Paper provided by Max Planck Institute for Research on Collective Goods in its series Working Paper Series of the Max Planck Institute for Research on Collective Goods with number 2008_31.

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    Date of creation: Aug 2008
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    Handle: RePEc:mpg:wpaper:2008_31

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    Related research

    Keywords: Optimal Taxation; public goods provision; Revelation of Preferences;

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    References

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    1. d'Aspremont, Claude & Gerard-Varet, Louis-Andre, 1979. "Incentives and incomplete information," Journal of Public Economics, Elsevier, vol. 11(1), pages 25-45, February.
    2. Robin Boadway & Michael Keen, 1991. "Public Goods, Self-Selection and Optimal Income Taxation," Working Papers 828, Queen's University, Department of Economics.
    3. Dirk Bergemann & Stephen Morris, 2003. "Robust Mechanism Design," Cowles Foundation Discussion Papers 1421R, Cowles Foundation for Research in Economics, Yale University, revised Apr 2004.
    4. Hammond, Peter J, 1979. "Straightforward Individual Incentive Compatibility in Large Economies," Review of Economic Studies, Wiley Blackwell, vol. 46(2), pages 263-82, April.
    5. Martin Hellwig, 2004. "Optimal Income Taxation, Public-Goods Provision and Public-Sector Pricing: A Contribution to the Foundations of Public Economics," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2004_14, Max Planck Institute for Research on Collective Goods.
    6. Martin F. Hellwig, 2003. "Public-Good Provision with Many Participants," Review of Economic Studies, Oxford University Press, vol. 70(3), pages 589-614.
    7. Neeman, Zvika, 2004. "The relevance of private information in mechanism design," Journal of Economic Theory, Elsevier, vol. 117(1), pages 55-77, July.
    8. Gahvari, Firouz, 2006. "On the marginal cost of public funds and the optimal provision of public goods," Journal of Public Economics, Elsevier, vol. 90(6-7), pages 1251-1262, August.
    9. Gaube, Thomas, 2000. "When do distortionary taxes reduce the optimal supply of public goods?," Journal of Public Economics, Elsevier, vol. 76(2), pages 151-180, May.
    10. Groves, Theodore, 1973. "Incentives in Teams," Econometrica, Econometric Society, vol. 41(4), pages 617-31, July.
    11. Louis Kaplow, 2003. "Public Goods and the Distribution of Income," NBER Working Papers 9842, National Bureau of Economic Research, Inc.
    12. Gary-Bobo, Robert J. & Jaaidane, Touria, 2000. "Polling mechanisms and the demand revelation problem," Journal of Public Economics, Elsevier, vol. 76(2), pages 203-238, May.
    13. Ehud Kalai, 2004. "Large Robust Games," Econometrica, Econometric Society, vol. 72(6), pages 1631-1665, November.
    14. Sandmo, Agnar, 1998. "Redistribution and the marginal cost of public funds," Journal of Public Economics, Elsevier, vol. 70(3), pages 365-382, December.
    15. 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.
    16. 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.
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    Cited by:
    1. Traxler, Christian, 2012. "Majority voting and the welfare implications of tax avoidance," Journal of Public Economics, Elsevier, vol. 96(1), pages 1-9.
    2. Felix Bierbrauer, 2008. "A unified approach to the revelation of public goods preferences and to optimal income taxation," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2008_39, Max Planck Institute for Research on Collective Goods.

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