IDEAS home Printed from https://ideas.repec.org/p/ecm/feam04/551.html
   My bibliography  Save this paper

A Characterization of Optimal Feasible Tax Mechanism

Author

Listed:
  • Byungchae Rhee

Abstract

This paper is motivated by a practical income (or wealth) taxation problem: For a public good economy where the provision of public goods is to be financed by income taxes collected from individuals, what is the optimal feasible tax mechanism when a social planner is relatively uninformed of the incomes or endowments of the individuals? This kind of problem, the optimal private provision of public goods, is a typical Bayesian mechanism design question for a small economy such as a club. In this case, the social planner has to take into account not only the individuals' incentive to report their income truthfully, but also the (individual) feasibility of the designed tax mechanism in the sense that each individual's tax payment should be consistent with their ability to pay. We employ the feasible implementation model used in Hurwicz, Maskin, and Postlewaite [1995] to study such an optimal taxation problem. It has been assumed in the standard model of optimal labor income taxation literature, pioneered by Mirrlees [1971], that there is a continuum of individuals and the (labor) income is observable to avoid the feasibility problem. Also, the literature on private provision of public goods has paid little attention to the continuous provision of public goods and the constrained efficiency under incomplete information. This paper considers a finite economy where public goods are provided continuously. Using a simple Bayesian model, we provide the full characterization of the two-agent, two-type optimal feasible tax mechanism and its properties. We find that (i) when the total endowment of the economy is relatively low enough or high enough, the first best feasible taxation can be obtained; (ii) the second best feasible tax mechanism requires a poor agent to pay relatively more than a rich agent, that is, it is regressive; and (iii) the tax mechanism is increasing in the sense that the agent's tax payment increases with his endowment. We also provide a comparative statics analysis. For the case of more than two agents, under certain mild assumptions we give some partial results similar to (i) and (ii) above. In addition, we find the optimal feasible tax mechanism for the corresponding infinitely large economy

Suggested Citation

  • Byungchae Rhee, 2004. "A Characterization of Optimal Feasible Tax Mechanism," Econometric Society 2004 Far Eastern Meetings 551, Econometric Society.
  • Handle: RePEc:ecm:feam04:551
    as

    Download full text from publisher

    File URL: http://repec.org/esFEAM04/up.10860.1079681544.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Palfrey, Thomas R., 2002. "Implementation theory," Handbook of Game Theory with Economic Applications,in: R.J. Aumann & S. Hart (ed.), Handbook of Game Theory with Economic Applications, edition 1, volume 3, chapter 61, pages 2271-2326 Elsevier.
    2. Stiglitz, Joseph E., 1987. "Pareto efficient and optimal taxation and the new new welfare economics," Handbook of Public Economics,in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 2, chapter 15, pages 991-1042 Elsevier.
    3. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
    4. Gradstein, Mark, 1994. "Efficient Provision of a Discrete Public Good," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(4), pages 877-897, November.
    5. Nir Dagan & Oscar Volij & Roberto Serrano, 1999. "Feasible implementation of taxation methods," Review of Economic Design, Springer;Society for Economic Design, vol. 4(1), pages 57-72.
    6. Lu Hong, 1996. "Bayesian implementation in exchange economies with state dependent feasible sets and private information," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 13(4), pages 433-444.
    7. Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, vol. 47(1), pages 61-73, January.
    8. Matthew O. Jackson, 2001. "A crash course in implementation theory," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 18(4), pages 655-708.
    9. Eric Maskin, 1999. "Nash Equilibrium and Welfare Optimality," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 23-38.
    10. Bergstrom, Theodore & Blume, Lawrence & Varian, Hal, 1986. "On the private provision of public goods," Journal of Public Economics, Elsevier, vol. 29(1), pages 25-49, February.
    11. John O. Ledyard & Thomas R. Palfrey, 1999. "A Characterization of Interim Efficiency with Public Goods," Econometrica, Econometric Society, vol. 67(2), pages 435-448, March.
    12. d'Aspremont, Claude & Gerard-Varet, Louis-Andre, 1979. "Incentives and incomplete information," Journal of Public Economics, Elsevier, vol. 11(1), pages 25-45, February.
    13. Maskin, Eric & Sjostrom, Tomas, 2002. "Implementation theory," Handbook of Social Choice and Welfare,in: K. J. Arrow & A. K. Sen & K. Suzumura (ed.), Handbook of Social Choice and Welfare, edition 1, volume 1, chapter 5, pages 237-288 Elsevier.
    14. Guoqiang Tian, 1999. "Bayesian implementation in exchange economies with state dependent preferences and feasible sets," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 16(1), pages 99-119.
    15. Groves, Theodore, 1973. "Incentives in Teams," Econometrica, Econometric Society, vol. 41(4), pages 617-631, July.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    optimal taxation; feasibility; informational rent; second best;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • D71 - Microeconomics - - Analysis of Collective Decision-Making - - - Social Choice; Clubs; Committees; Associations

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecm:feam04:551. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum). General contact details of provider: http://edirc.repec.org/data/essssea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.