Thomas Gaube

When do distortionary taxes reduce the optimal supply of public goods

It is often argued that the optimal level of public good provision is below the first-best level as long as the governments expenditures have to be financed by distortionary taxes. I examine this hypothesis and show that it is correct in a representative consumer economy if (i) the public good is normal and (ii) private commodities are normal and gross substitutes. Otherwise, counterexamples can be constructed. These results hold also with heterogeneous households provided that equity considerations are ignored. In general, however, distributional objectives may lead to a higher level of public expenditures in second best than in first best.

Group size and free riding when private and public goods are gross substitutes

Using the traditional model of voluntary public good provision, it is shown that an expansion of group size exacerbates free riding tendencies as long as private consumption and the public good are strictly normal and weak gross substitutes. This result generalizes a previous Cobb-Douglas example with respect to preferences and asymmetric equilibria.

Second-Best Pollution Taxation and Environmental Quality

This paper deals with second-best pollution taxation by investigating allocations instead of the corresponding tax rates. Assuming certain restrictions on utility and that the marginal revenue from environmental taxation is positive, it is shown that environmental quality is higher in second best where only distortionary taxes are used to finance public expenditures than in the first-best optimum where lump-sum taxes are available.

Does Old Capital Matter for Implementing a Pareto-Improving Tax Reform?:

Is it possible to replace the income tax by a consumption tax or a wage tax such that (1) a dynamic (intergenerational) Pareto improvement is obtained and (2) only the information available from enforcing the income tax is used? In this article, it is shown that such a transition is feasible if and only if in a static setting, the consumption or wage tax induces less distortions than the income tax.

Consumption vs. wage taxation and the capital levy

Abstract Based on a representative consumer framework, it has been argued that wage taxation is inferior to consumption taxation. This note shows that the opposite result may emerge in a model where households are heterogeneous and where a uniform (poll) tax or subsidy is available.