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

47 Pages Posted: 14 May 2010

See all articles by Felix J. Bierbrauer

Felix J. Bierbrauer

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

Date Written: May 2010

Abstract

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.

Keywords: Public Goods, Optimal Taxation, Mechanism Design

JEL Classification: D71, D82, H21, H41

Suggested Citation

Bierbrauer, Felix J., Optimal Income Taxation and Public-Goods Provision with Preference and Productivity Shocks (May 2010). MPI Collective Goods Preprint, No. 2010/18. Available at SSRN: https://ssrn.com/abstract=1604374 or http://dx.doi.org/10.2139/ssrn.1604374

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

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