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Optimal Income Taxation and Public-Goods Provision with Preference and Productivity Shocks

  • Felix Bierbrauer

    ()

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

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    We study how an optimal income tax and an optimal public-goods provision rule respond to preference and productivity shocks. A conventional Mirrleesian treatment is shown to provoke manipulations of the policy mechanism by individuals with similar interests. We therefore extend the Mirrleesian model so as to include a requirement of coalition-proofness. The main results are the following: first, the possibility of preference shocks yields a new set of collective incentive constraints. Productivity shocks have no such implication. Second, the optimal policy gives rise to a positive correlation between the public-goods provision level, the extent of redistribution and marginal tax rates.

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    File URL: http://www.coll.mpg.de/pdf_dat/2010_18online.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 2010_18.

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    Date of creation: May 2010
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    Handle: RePEc:mpg:wpaper:2010_18
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