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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, Government Institute for Economic Research Finland (VATT).
  • 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.
    2. John, A & Pecchenino, R, 1994. "An Overlapping Generations Model of Growth and the Environment," Economic Journal, Royal Economic Society, vol. 104(427), pages 1393-1410, November.
    3. Atkinson, A B & Sandmo, A, 1980. "Welfare Implications of the Taxation of Savings," Economic Journal, Royal Economic Society, vol. 90(359), pages 529-549, September.
    4. Pestieau, P. M., 1974. "Optimal taxation and discount rate for public investment in a growth setting," Journal of Public Economics, Elsevier, pages 217-235.
    5. A. B. Atkinson & N. H. Stern, 1974. "Pigou, Taxation and Public Goods," Review of Economic Studies, Oxford University Press, vol. 41(1), pages 119-128.
    6. Myles, Gareth D., 1997. "Depreciation and intergenerational altruism in the private provision of public goods," European Journal of Political Economy, Elsevier, vol. 13(4), pages 725-738, December.
    7. Vidar Christiansen, 1981. "Evaluation of Public Projects under Optimal Taxation," Review of Economic Studies, Oxford University Press, vol. 48(3), pages 447-457.
    8. Park, No-Ho, 1991. "Steady-state solutions of optimal tax mixes in an overlapping-generations model," Journal of Public Economics, Elsevier, pages 227-246.
    9. 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, pages 1-26.
    10. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, pages 55-75.
    11. Nielsen, Soren Bo & Sorensen, Peter Birch, 1997. "On the optimality of the Nordic system of dual income taxation," Journal of Public Economics, Elsevier, pages 311-329.
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    Cited by:

    1. Cremer, Helmuth & Pestieau, Pierre & Rochet, Jean-Charles, 2003. "Capital income taxation when inherited wealth is not observable," Journal of Public Economics, Elsevier, pages 2475-2490.
    2. Nathalie Mathieu-Bolh, 2011. "Optimal taxation and borrowing constraints," Economía, Instituto de Investigaciones Económicas y Sociales (IIES). Facultad de Ciencias Económicas y Sociales. Universidad de Los Andes. Mérida, Venezuela, vol. 36(31), pages 9-53, January-j.
    3. Brett, Craig, 1998. "A note on nonlinear taxation in an overlapping generations model," MPRA Paper 8776, University Library of Munich, Germany.

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