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On the Assumptions of the Optimal Taxation Problem: Is Distortionary Taxation a Burden or a Blessing?

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  • Pedro Teles

    (Banco de Portugal, Universidade Catolica Portuguesa and CEPR;)

Abstract

I consider a reasonable deviation from the standard assumptions in the optimal taxation literature on public consumption and show that the results on the optimal taxes are substantially altered. In particular, `distortionary' taxes may be optimal after all. This reveals that, in contrast to the common practice, the analysis of optimal taxation cannot be done independently of the analysis of the optimal public provision of goods and services.

Suggested Citation

  • Pedro Teles, 2009. "On the Assumptions of the Optimal Taxation Problem: Is Distortionary Taxation a Burden or a Blessing?," 2009 Meeting Papers 926, Society for Economic Dynamics.
    • Handle: RePEc:red:sed009:926
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    References listed on IDEAS

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    1. Chari, V.V. & Kehoe, Patrick J., 1999. "Optimal fiscal and monetary policy," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 26, pages 1671-1745, Elsevier.
    2. Finn E. Kydland & Edward C. Prescott, 1990. "Business cycles: real facts and a monetary myth," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 14(Spr), pages 3-18.
    3. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
    4. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 38(2), pages 175-208.
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    Cited by:

    1. Lewis, Vivien, 2013. "Optimal Monetary Policy And Firm Entry," Macroeconomic Dynamics, Cambridge University Press, vol. 17(8), pages 1687-1710, December.

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