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Optimal Income Taxation and Public Good Provision in a Two-Class Economy

  • Bierbrauer, Felix
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    This paper combines the problem of optimal income taxation with the free-rider problem in public good provision. There are two groups of individuals with private information on their earning ability and their valuation of a public good. Adjustments of the transfer system are needed to discourage the more productive from exaggerating the desirability of public good provision. Similarly, the less productive need to be prevented from understating their valuation. Relative to an optimal income tax, which focuses solely on earning ability, income transfers are increased whenever a public good is installed and are decreased otherwise.

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    File URL: http://epub.ub.uni-muenchen.de/13454/1/97.pdf
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    Paper provided by Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems with number 97.

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    Date of creation: Jan 2006
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    Handle: RePEc:trf:wpaper:97
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    1. Martin Hellwig, 2007. "A Contribution to the Theory of Optimal Utilitarian Income Taxation," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2007_2, Max Planck Institute for Research on Collective Goods.
    2. Dirk Bergemann & Stephen Morris, 2005. "Robust Mechanism Design," NajEcon Working Paper Reviews 666156000000000593, www.najecon.org.
    3. Weymark, John A., 1986. "A reduced-form optimal nonlinear income tax problem," Journal of Public Economics, Elsevier, vol. 30(2), pages 199-217, July.
    4. 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.
    5. Laffont, Jean-Jacques & Martimort, David, 1999. " Collusion-Proof Samuelson Conditions for Public Goods," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 1(4), pages 399-438.
    6. Robin Boadway & Katherine Cuff & Maurice Marchand, 1999. "Optimal Income Taxation With Quasi-Linear Preferences Revisited," Working Papers 984, Queen's University, Department of Economics.
    7. Ehud Kalai, 2002. "Large Robust Games," Discussion Papers 1350, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    8. Stiglitz, Joseph E., 1987. "Pareto efficient and optimal taxation and the new new welfare economics," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 2, chapter 15, pages 991-1042 Elsevier.
    9. 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.
    10. Gabrielle Demange & Roger Guesnerie, 2001. "On coalitional stability of anonymous interim mechanisms," Economic Theory, Springer, vol. 18(2), pages 367-389.
    11. Hammond, Peter J, 1979. "Straightforward Individual Incentive Compatibility in Large Economies," Review of Economic Studies, Wiley Blackwell, vol. 46(2), pages 263-82, April.
    12. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
    13. Laffont & Martimort, 1997. "Collusion under asymmetric information," Working Papers 152574, Institut National de la Recherche Agronomique, France.
    14. Bernheim, B. Douglas & Peleg, Bezalel & Whinston, Michael D., 1987. "Coalition-Proof Nash Equilibria I. Concepts," Journal of Economic Theory, Elsevier, vol. 42(1), pages 1-12, June.
    15. Joseph Farrell & Matthew Rabin, 1996. "Cheap Talk," Journal of Economic Perspectives, American Economic Association, vol. 10(3), pages 103-118, Summer.
    16. Stiglitz, Joseph E., 1982. "Self-selection and Pareto efficient taxation," Journal of Public Economics, Elsevier, vol. 17(2), pages 213-240, March.
    17. Al-Najjar, Nabil I., 2004. "Aggregation and the law of large numbers in large economies," Games and Economic Behavior, Elsevier, vol. 47(1), pages 1-35, April.
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