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

41 Pages Posted: 8 Dec 2005

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: November 2005

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.

Keywords: Income Taxation, Public Good Provision, Revelation of Preferences, Two-dimensional Heterogeneity

JEL Classification: D71, D82, H21, H41

Suggested Citation

Bierbrauer, Felix J., Optimal Income Taxation and Public Good Provision in a Two-Class Economy (November 2005). MPI Collective Goods Preprint No. 2005/25. Available at SSRN: https://ssrn.com/abstract=869213 or http://dx.doi.org/10.2139/ssrn.869213

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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