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Optimal Income Taxation and Public Good Provision in a Two-Class Economy

Felix Bierbrauer

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: This paper combines the problem of optimal income taxation with the free-rider problem in public good provision. There are two groups of individuals with private information on their earning ability and their valuation of a public good. Adjustments of the transfer system are needed to discourage the more productive from exaggerating the desirability of public good provision. Similarly, the less productive need to be prevented from understating their valuation. Relative to an optimal income tax, which focuses solely on earning ability, income transfers are increased whenever a public good is installed and are decreased otherwise.

Keywords: Income Taxation; Public Good Provision; Revelation of Preferences; Two-dimensional Heterogeneity (search for similar items in EconPapers)
JEL-codes: D71 D82 H21 H41 (search for similar items in EconPapers)
Date: 2006-01
New Economics Papers: this item is included in nep-pbe and nep-pub
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