Optimal Taxation under Imperfect Trust

Emin Ablyatifov and Georgy Lukyanov

No 26-1711, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: We study optimal taxation when the conversion of tax revenue into public goods is uncertain. In a static Ramsey framework with a representative household, a competitive firm, and two broad instruments (a labor-income tax and a commodity/output tax), a simple measure of trust— the perceived likelihood that revenue is actually delivered as public consumption—scales the marginal value of public funds. We show: (i) a trust threshold below which any distortionary taxation reduces welfare; (ii) above that threshold, policy uniquely pins down the scale of taxation but leaves a continuum of tax mixes (an equivalence frontier) that implement the same allocation and welfare; and (iii) tiny administrative or salience wedges select a unique instrument, typically favoring a broad base collected at source. We derive a trust-adjusted Ramsey rule in sufficient-statistics form, establish robustness to mild preference non-separabilities and concave public-good utility, and provide an isoelastic specialization with transparent comparative statics.

Keywords: Optimal taxation; public goods; credibility; marginal value of public funds; tax; mix; administration. (search for similar items in EconPapers)
JEL-codes: C73 E61 H21 H30 (search for similar items in EconPapers)
Date: 2026-02-13
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.tse-fr.eu/sites/default/files/TSE/docu ... 2026/wp_tse_1711.pdf Full Text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:tse:wpaper:131432

Access Statistics for this paper

More papers in TSE Working Papers from Toulouse School of Economics (TSE) Contact information at EDIRC.
Bibliographic data for series maintained by ().