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Consuming your way to efficiency: Public goods provision through non-distortionary tax lotteries

Thomas Giebe () and Paul Schweinzer

European Journal of Political Economy, 2014, vol. 36, issue C, 1-12

Abstract: We revisit the classical result that taxation of private consumption is distortionary and therefore precludes the efficient provision of public goods. We introduce a nonlinear consumption tax which we call a ‘tax lottery’. Under this scheme, an ad-valorem consumption tax is supplemented with a lottery in which consumers can win cash prizes. The winning probabilities in this lottery depend on all consumers' private good consumption decisions. We show that for a given ad-valorem tax, an appropriately designed lottery can implement an efficient allocation in pure-strategy Nash equilibrium. The lottery component corrects the distortion in private consumption due to the ad-valorem tax, while the resulting tax revenue is sufficient to efficiently provide the public good and pay out the lottery prize.

Keywords: Public goods; Contests; Taxation; Tax refunds (search for similar items in EconPapers)
JEL-codes: C7 D7 H0 (search for similar items in EconPapers)
Date: 2014
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Working Paper: Consuming your Way to Efficiency: Public Goods Provision through Non-Distortionary Tax Lotteries (2013) Downloads
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