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Optimal Taxation and Public Goods

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  • J. Moreh

    (The Queen's University of Belfast)

Abstract

In this article I construct a simple optimal income tax model in which I include a public good in the beliefthat it is a better approximation to reality than models that exclude it. The model comprises a Social Welfare Function (SWF), a government budget, and a constant elasticity of substitution utility function, whose arguments are: a private good, a public good, and leisure. The SWF can in principle be maximized with respect to the labor supply and to the amount of public good. My estimate of the optimal tax rate is higher and more realistic than are the predictions of models that do not allow for a public good. My results are consistent with the finding of empirical research, namely that the substitution parameter of the CES utility function is negative. Howew, the proposition derived from it (which forms the basis of recent work on income redistribution)—that the expenditure on public goods is regressive—has little significance, since it is the progressivity of the entire fiscal system that counts.

Suggested Citation

  • J. Moreh, 1983. "Optimal Taxation and Public Goods," Public Finance Review, , vol. 11(2), pages 181-201, April.
    • Handle: RePEc:sae:pubfin:v:11:y:1983:i:2:p:181-201
    DOI: 10.1177/109114218301100203
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    References listed on IDEAS

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    1. Michael J. Boskin & Eytan Sheshinski, 1978. "Optimal Redistributive Taxation When Individual Welfare Depends upon Relative Income," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 92(4), pages 589-601.
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    3. Yew-Kwang Ng, 1975. "Bentham or Bergson? Finite Sensibility, Utility Functions and Social Welfare Functions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 42(4), pages 545-569.
    4. Aaron, Henry & McGuire, Martin, 1970. "Public Goods and Income Distribution," Econometrica, Econometric Society, vol. 38(6), pages 907-920, November.
    5. Brennan, Geoffrey, 1976. "The Distributional Implications of Public Goods," Econometrica, Econometric Society, vol. 44(2), pages 391-399, March.
    6. Sato, Kazuo, 1972. "Additive Utility Functions with Double-Log Consumer Demand Functions," Journal of Political Economy, University of Chicago Press, vol. 80(1), pages 102-124, Jan.-Feb..
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