Efficient Public Good Provision with Nonlinear Income Taxation
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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