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

Bierbrauer, Felix (January 2006): Optimal Income Taxation and Public Good Provision in a Two-Class Economy. SFB/TR 15 Discussion Paper No. 97

Abstract

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.

• Item Type: Paper
• Keywords: Income Taxation, Public Good Provision, Revelation of Preferences, Two-dimensional Heterogeneity
• Faculties: Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems; Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems > B3 - Unternehmenskontrolle, Unternehmensfinanzierung und Effizienz
• Subjects: 300 Social sciences > 330 Economics
• JEL Classification: D71, D82, H21, H41
• Language: English