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On Optimal Non-Linear Taxation and Public Good Provision in Overlapping Generations Economy

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  • Pirttilä, Jukka
  • Tuomala, Matti

Abstract

Using the self-selection approach to tax analysis within an OLG framework, the paper examines optimal non-linear labour and capital income taxation and the provision of a durable public good. Under endogenous wages, the marginal tax rules depend, among other things, on the income earning abilities of the households and suggest a novel rationale for distorting capital income taxation. For the public good, the paper derives a dynamic analogue of the second-best Samuelson rule, encompassing both inter- and intragenerational redistributive considerations, and characterises special conditions under which the first-best provision rule holds under distorting taxation.

Suggested Citation

  • Pirttilä, Jukka & Tuomala, Matti, 1999. "On Optimal Non-Linear Taxation and Public Good Provision in Overlapping Generations Economy," Discussion Papers 200, VATT Institute for Economic Research.
    • Handle: RePEc:fer:dpaper:200
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    File URL: https://www.doria.fi/handle/10024/148396
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    References listed on IDEAS

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    1. Boadway, Robin & Keen, Michael, 1993. "Public Goods, Self-Selection and Optimal Income Taxation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(3), pages 463-478, August.
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    11. Ordover, J. A. & Phelps, E. S., 1979. "The concept of optimal taxation in the overlapping-generations model of capital and wealth," Journal of Public Economics, Elsevier, vol. 12(1), pages 1-26, August.
    12. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 55-75.
    13. Batina, Raymond G., 1990. "Public goods and dynamic efficiency : The modified Samuelson rule," Journal of Public Economics, Elsevier, vol. 41(3), pages 389-400, April.
    14. Nielsen, Soren Bo & Sorensen, Peter Birch, 1997. "On the optimality of the Nordic system of dual income taxation," Journal of Public Economics, Elsevier, vol. 63(3), pages 311-329, February.
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