Labour income uncertainty, taxation and public good provision

Jukka Pirttilä and Matti Tuomala

Economic Journal, 2007, vol. 117, issue 518, 567-582

Abstract: This article examines optimal nonlinear income taxation, commodity taxation and public good provision under income uncertainty in a moral hazard framework. Uniform commodity taxation and the Samuelson rule for public good provision are desirable under similar conditions as in the conventional tax model. Deviations from these rules is warranted if one can encourage effort by subsidising certain goods and overproviding public goods. We also determine a rule for the optimal marginal income tax rate and provide some numerical simulations. Conditions for the validity of the solution procedure used in this class of models, the first-order approach, are also explored. Copyright 2007 The Author(s). Journal compilation Royal Economic Society 2007.

Date: 2007
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