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Public good provision financed by nonlinear income tax under reduction of envy

Takuya Obara and Shuichi Tsugawa

Working Papers from Tokyo Center for Economic Research

Abstract: We examine optimal taxation and public good provision by a government that considers reduction of envy as a constraint. We adopt the extended envy-freeness proposed by Diamantaras and Thomson (1990), called λ-equitability. We derive the modified Samuelson rule under an optimal nonlinear income tax and show, using a constant elasticity of substitution utility function, that the direction of distorting the original Samuelson rule to relax the λ envy-free constraint is crucially determined by the elasticity of substitution. Furthermore, we numerically show that the optimal level of provision increases (decreases) in the degree of envy-freeness when the original Samuelson rule is upwardly (downwardly) distorted.

New Economics Papers: this item is included in nep-pbe, nep-pub and nep-upt
Date: 2019-02
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