This paper studies optimal taxation in the context of provision of public goods when benefits are age-dependent. We develop a two period overlapping generations model with endogenous labor supply in both periods. We examine how the optimal Ramsey capital and labor income taxes change when the government fails to choose the optimal public provision for each cohort. The deviations of public expenditure from the optimal level create distortions at the intra and inter temporal margins and taxes are required to correct these distortions. We show that regardless of preferences, the government may choose to tax capital in the long run if spending on each cohort is not optimal. We also show that when sufficient tax instruments are available the Ramsey equilibrium can attain the first-best optimum.
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Publisher Info
Paper provided by University of Washington, Department of Economics in its series Working Papers with number
UWEC-2007-21-FC.
Length: Date of creation: Oct 2007 Date of revision:
Oct 2007 Publication status: Forthcoming in Journal of Public Economic Theory Handle: RePEc:udb:wpaper:uwec-2007-21-fc
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