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Optimal Democratic Mechanisms for Taxation and Public Good Provision

37 Pages Posted: 16 May 2008  

Felix J. Bierbrauer

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods

Marco Sahm

University of Munich

Date Written: March 4, 2008

Abstract

We study the interdependence of optimal tax and expenditure policies. An optimal policy requires that information on preferences is made available. We first study this problem from a general mechanism design perspective and show that efficiency is possible only if the individuals who decide on public good provision face an own incentive scheme that differs from the tax system. We then study democratic mechanisms with the property that tax payers vote over public goods. Under such a mechanism, efficiency cannot be reached and welfare from public good provision declines as the inequality between rich and poor individuals increases.

Keywords: Public goods, optimal taxation, two-dimensional heterogeneity, asymmetric information

JEL Classification: H41, D71, D72, D82

Suggested Citation

Bierbrauer, Felix J. and Sahm, Marco, Optimal Democratic Mechanisms for Taxation and Public Good Provision (March 4, 2008). MPI Collective Goods Preprint, 2008/9. Available at SSRN: https://ssrn.com/abstract=1133400 or http://dx.doi.org/10.2139/ssrn.1133400

Felix J. Bierbrauer (Contact Author)

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany

Marco Sahm

University of Munich ( email )

Geschwister-Scholl-Platz 1
Munich, Bavaria 80539
Germany

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