Optimal Redistributive Taxation when Government’s and Agents’ Preferences Differ

Paternalism, merit goods and specific egalitarianism are concepts we sometimes meet in the literature. The thing in common is that the policy maker does not fully respect the consumer sovereignty principle and designs policies according to some other criterion than individuals’ preferences. Using the self-selection approach to tax problems developed by Stiglitz (1982) and Stern (1982), the paper provides a characterization of the properties of an optimal redistributive mixed tax scheme in the general case when the government evaluates individuals’ well-being using a different utility function than the one maximized by private agents.optimal taxation, behavioral economics, paternalism, merit goods, non-welfarism

Redistribution, In-Kind Transfers and Matching Grants when the Federal Government Lacks Information on Local Costs

Recent literature on optimal nonlinear taxation has shown that in models with a single level of government public provision of private goods can help redistribution by mitigating self-selection constraints. The aim of the present paper is to extend the analysis to a fiscal federalism setting with two levels of government. To accomplish this goal we start by explicitly modelling the informational asymmetry that in our framework motivates decentralization in the first place: the lower level is able to observe the local costs of production, which vary across localities, but the central level does not. Then, using an extended version of the optimal income taxation model with two ability types, we show that even though it is the lower level that is responsible for the public provision of private goods, in-kind transfers can still help the federal level to redistribute between high- and low skilled individuals. Finally, we characterize the optimal marginal tax rates, which take a different form from that of a unitary model, and the optimal matching grants. The latter, in particular, have a very different structure than the one derived in previous fiscal federalism studies. We also find that it is vital to model informational asymmetries between the central and the local level explicitly. Models where the informational asymmetry is not explicit might have very little to say about decentralization in economies where the local level has an informational advantage over the central level.Optimal taxation; in-kind transfers; public provision of day care; fiscal federalism

Optimal Utilitarian Taxation and Horizontal Equity

We impose a horizontal equity constraint on the problem of finding the optimal utilitarian tax mix. The horizontal equity constraint requires that individuals with the same ability have to pay the same amount of taxes regardless of their preferences for leisure. Contrary to normal findings, we find that a good that is complementary to leisure need not be discouraged by the tax system, and that a good that normally should be discouraged by the tax system need not be taxed at a positive rate even if the economy is composed of only two private commodities plus leisure. Similarly, the marginal effective tax rate need not be equal to zero at the top when the tax mix obeys the horizontal equity constraint.

Optimal Utilitarian Taxation and Horizontal Equity

We impose a horizontal equity restriction on the problem of finding the optimal utilitarian tax mix. The horizontal equity constraint requires that individuals with the same ability have to pay the same amount of taxes regardless of their preferences for leisure. Contrary to normal findings, we find that a good that is complementary to leisure need not be discouraged by the tax system, and that a good that normally should be discouraged by the tax system need not be taxed at a positive rate even if the economy is composed of only two private commodities plus leisure. Similarly, the marginal effective tax rate need not be equal to zero at the top when the tax mix obeys the horizontal equity constraint.Horizontal equity; optimal taxation; heterogeneous preferences; utilitarianism

Age Related Optimal Income Taxation

The focus of the present paper is on the intragenerational effects of nonlinear income taxation in a multiperiod framework. We investigate whether it is possible to achieve redistribution at smaller efficiency costs by enlarging the message space adopted in standard tax system (which only includes reported income) to consider also the age of taxpayers. Since it would be awkward to analyze an age related tax without taking into account the time-dimension, we use an intertemporal extension of the Stiglitz-Stern (1982, 1982) discrete adaptation of the Mirrlees (1971) optimal income taxation model. In the simplest version of the model we neglect the possibility of savings. This case can be interpreted as a situation with extreme liquidity constraints. It is shown that switching to an age related tax system opens the way for a Pareto improving tax reform entailing a cut in marginal tax rates for young agents. In a second version of the model we retain the possibility of savings and, assuming that the policy maker can tax interest incomes on a linear scale, we also analyze the optimal values of the interest income tax rate for the age dependent and the age independent tax systems.Optimal taxation; age specific taxes; tagging

Optimal Redistributive Taxation when Government’s and Agents’ Preferences Differ

Paternalism, merit goods and specific egalitarianism are concepts we sometimes meet in the literature. The thing in common is that the policy maker does not fully respect the consumer sovereignty principle and design policies according to some other criterion than individuals’ preferences. Using the self-selection approach to tax problems developed by Stiglitz (1982) and Stern (1982), the paper provides a characterization of the properties of an optimal redistributive mixed tax scheme in the general case when the government evaluates individuals’ well-being using a different utility function than the one maximized by private agents.optimal taxation; behavioral economics; paternalism; merit goods; non-welfarism

Intergenerational Transmission of Skills during Childhood and Optimal Public Policy

The paper characterizes the optimal tax policy and the optimal quality of day care services in a OLG model with warm-glow altruism where parental choices over child care arrangements affect the probability that the child becomes a high-skilled adult in a type-specific way. With respect to previous contributions, optimal tax formulas include type-specific Pigouvian terms which correct for the intergenerational externality in human capital accumulation. Our numerical simulations suggest that a public policy that disregards the effects of parental time on children's human capital entails a welfare loss that ranges from 0:2% to 5:7% of aggregate consumption.optimal taxation, day care quality, intergenerational transmission of skills, early childhood environment, warm-glow