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Optimal Income Taxation, Public Goods Provision and Robust Mechanism Design

  • Felix Bierbrauer

    ()

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

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    This paper extends the model of optimal income taxation due to Mirrlees (1971) and includes private information on public goods preferences. A mechanism design approach is used to establish the following result: If policies are required to be robustly implementable in the sense of Bergemann and Morris (2005), then the optimality conditions in the extended model with uncertainty about tax and expenditure policies, are the same as in the standard model of optimal income taxation. The paper provides a foundation for a widely used assumption in public nance, namely that individuals optimize their behaviour subject to a predetermined and commonly known tax system.

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    File URL: http://www.coll.mpg.de/pdf_dat/2008_31online.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 2008_31.

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    Date of creation: Aug 2008
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    Handle: RePEc:mpg:wpaper:2008_31
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    1. Neeman, Z., 1998. "The Relevance of Private Infromation in Mechanism Design," Papers 93, Boston University - Department of Economics.
    2. Hellwig, Martin, 2004. "Optimal income taxation, public-goods provision and public-sector pricing : a contribution to the foundations of public economics," Papers 04-42, Sonderforschungsbreich 504.
    3. d'Aspremont, Claude & Gerard-Varet, Louis-Andre, 1979. "Incentives and incomplete information," Journal of Public Economics, Elsevier, vol. 11(1), pages 25-45, February.
    4. 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.
    5. Ehud Kalai, 2002. "Large Robust Games," Discussion Papers 1350, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    6. Stephen Morris & Dirk Bergemann, 2004. "Robust Mechanism Design," Yale School of Management Working Papers ysm380, Yale School of Management.
    7. Sandmo, Agnar, 1998. "Redistribution and the marginal cost of public funds," Journal of Public Economics, Elsevier, vol. 70(3), pages 365-382, December.
    8. R. J. Gary-Bobo & T. Jaaidane, 1996. "Polling mechanisms and the demand revelation problem," THEMA Working Papers 96-31, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    9. Groves, Theodore, 1973. "Incentives in Teams," Econometrica, Econometric Society, vol. 41(4), pages 617-31, July.
    10. Peter J. Hammond, 1979. "Straightforward Individual Incentive Compatibility in Large Economies," Review of Economic Studies, Oxford University Press, vol. 46(2), pages 263-282.
    11. 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 463-78, August.
    12. Louis Kaplow, 2003. "Public Goods and the Distribution of Income," NBER Working Papers 9842, National Bureau of Economic Research, Inc.
    13. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
    14. 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.
    15. 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.
    16. Martin F. Hellwig, 2003. "Public-Good Provision with Many Participants," Review of Economic Studies, Oxford University Press, vol. 70(3), pages 589-614.
    17. Gahvari, Firouz, 2006. "On the marginal cost of public funds and the optimal provision of public goods," Journal of Public Economics, Elsevier, vol. 90(6-7), pages 1251-1262, August.
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