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Distortionary Taxation and the Free-Rider Problem

  • Felix Bierbrauer

    ()

    (Max Planck Institute for Research on Collective Goods, Bonn)

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    This paper derives a version of the Samuelson rule, which takes not only the marginal costs of public funds into account but also the desirability of preference revelation. Under a linear income tax more able individuals suffer from a larger utility loss if taxes are raised to cover the cost of public good provision. This implies that these individuals are tempted to understate their valuation of the public good. Likewise, less productive individuals are inclined to exaggerate their valuation. These incentive concerns require the use of excessive taxes. They ensure a truthful revelation of preferences for the public good. Under an optimal utilitarian tax constitution, individuals are not granted influence on public good provision if the taxes needed to induce informative behavior are prohibitively high.

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    File URL: http://www.coll.mpg.de/pdf_dat/2006_06online.pdf
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    Paper provided by Max Planck Institute for Research on Collective Goods in its series Working Paper Series of the Max Planck Institute for Research on Collective Goods with number 2006_6.

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    Length: 28 pages
    Date of creation: Mar 2006
    Date of revision:
    Handle: RePEc:mpg:wpaper:2006_06
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    1. Green, Jerry & Laffont, Jean-Jacques, 1977. "Characterization of Satisfactory Mechanisms for the Revelation of Preferences for Public Goods," Econometrica, Econometric Society, vol. 45(2), pages 427-38, March.
    2. Martin F. Hellwig, 2003. "Public-Good Provision with Many Participants," Review of Economic Studies, Oxford University Press, vol. 70(3), pages 589-614.
    3. Cremer, Helmuth & Pestieau, Pierre & Rochet, Jean-Charles, 2001. "Direct versus Indirect Taxation: The Design of the Tax Structure Revisted," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(3), pages 781-99, August.
    4. Martin Hellwig, 2004. "Optimal Income Taxation, Public-Goods Provision and Public-Sector Pricing: A Contribution to the Foundations of Public Economics," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2004_14, Max Planck Institute for Research on Collective Goods.
    5. Sheshinski, Eytan, 1972. "The Optimal Linear Income-Tax," Review of Economic Studies, Wiley Blackwell, vol. 39(3), pages 297-302, July.
    6. Atkinson, Anthony B & Stern, N H, 1974. "Pigou, Taxation and Public Goods," Review of Economic Studies, Wiley Blackwell, vol. 41(1), pages 119-28, January.
    7. Robin Boadway & Michael Keen, 1991. "Public Goods, Self-Selection and Optimal Income Taxation," Working Papers 828, Queen's University, Department of Economics.
    8. Groves, Theodore, 1973. "Incentives in Teams," Econometrica, Econometric Society, vol. 41(4), pages 617-31, July.
    9. Wilson, John Douglas, 1991. "Optimal Public Good Provision with Limited Lump-Sum Taxation," American Economic Review, American Economic Association, vol. 81(1), pages 153-66, March.
    10. Jeff Ely, 2003. "Foundations of Dominant Strategy Mechanisms," Theory workshop papers 658612000000000064, UCLA Department of Economics.
    11. Edward Clarke, 1971. "Multipart pricing of public goods," Public Choice, Springer, vol. 11(1), pages 17-33, September.
    12. Felix Bierbrauer, 2005. "Optimal Income Taxation and Public Good Provision in a Two-Class Economy," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2005_25, Max Planck Institute for Research on Collective Goods.
    13. Stiglitz, Joseph E., 1982. "Self-selection and Pareto efficient taxation," Journal of Public Economics, Elsevier, vol. 17(2), pages 213-240, March.
    14. Armstrong, Mark & Rochet, Jean-Charles, 1999. "Multi-dimensional screening:: A user's guide," European Economic Review, Elsevier, vol. 43(4-6), pages 959-979, April.
    15. Gaube, Thomas, 2000. "When do distortionary taxes reduce the optimal supply of public goods?," Journal of Public Economics, Elsevier, vol. 76(2), pages 151-180, May.
    16. Nava, Mario & Schroyen, Fred & Marchand, Maurice, 1996. "Optimal fiscal and public expenditure policy in a two-class economy," Journal of Public Economics, Elsevier, vol. 61(1), pages 119-137, July.
    17. Hellwig, Martin F., 1986. "The optimal linear income tax revisited," Journal of Public Economics, Elsevier, vol. 31(2), pages 163-179, November.
    18. Ehud Kalai, 2004. "Large Robust Games," Econometrica, Econometric Society, vol. 72(6), pages 1631-1665, November.
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