Optimal Taxation under Imperfect Trust

Emin Ablyatifov and Georgy Lukyanov
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Emin Ablyatifov: Chercheur indépendant
Georgy Lukyanov: TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement

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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: Administration; Mix; Tax; Marginal value of public funds; Credibility; Public goods; Optimal taxation (search for similar items in EconPapers)
Date: 2026-02-16
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Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-05512146

DOI: 10.48550/arXiv.2509.03085

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