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Distortionary Taxation and the Free-Rider Problem

  • Felix Bierbrauer

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    (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. Hellwig, Martin F., 1986. "The optimal linear income tax revisited," Journal of Public Economics, Elsevier, vol. 31(2), pages 163-179, November.
    2. CREMER, Helmuth & PESTIEAU, Pierre & ROCHET, Jean-Charles, 1999. "Direct versus indirect taxation: the design of the tax structure revisited," CORE Discussion Papers 1999010, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    3. Kim-Sau Chung & Jeffrey C. Ely, 2003. "Foundations of Dominant Strategy Mechanisms," Discussion Papers 1372, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    4. Martin F. Hellwig, 2003. "Public-Good Provision with Many Participants," Review of Economic Studies, Oxford University Press, vol. 70(3), pages 589-614.
    5. 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.
    6. Joseph E. Stiglitz, 1981. "Self-Selection and Pareto Efficient Taxation," NBER Working Papers 0632, National Bureau of Economic Research, Inc.
    7. Groves, Theodore, 1973. "Incentives in Teams," Econometrica, Econometric Society, vol. 41(4), pages 617-31, July.
    8. Robin Boadway & Michael Keen, 1991. "Public Goods, Self-Selection and Optimal Income Taxation," Working Papers 828, Queen's University, Department of Economics.
    9. Sheshinski, Eytan, 1972. "The Optimal Linear Income-Tax," Review of Economic Studies, Wiley Blackwell, vol. 39(3), pages 297-302, July.
    10. 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.
    11. 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.
    12. 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.
    13. Ehud Kalai, 2002. "Large Robust Games," Discussion Papers 1350, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    14. 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.
    15. 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.
    16. Edward Clarke, 1971. "Multipart pricing of public goods," Public Choice, Springer, vol. 11(1), pages 17-33, September.
    17. 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.
    18. 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.
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