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Optimal Income Taxation and Public-Goods Provision with Preference and Productivity Shocks

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Bierbrauer,  Felix
Max Planck Institute for Research on Collective Goods, Max Planck Society;

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Citation

Bierbrauer, F. (2010). Optimal Income Taxation and Public-Goods Provision with Preference and Productivity Shocks.


Cite as: http://hdl.handle.net/11858/00-001M-0000-0028-6CCD-2
Abstract
We study how an optimal income tax and an optimal public-goods provision rule respond to preference and productivity shocks. A conventional Mirrleesian treatment is shown to provoke manipulations of the policy mechanism by individuals with similar interests. We therefore extend the Mirrleesian model so as to include a requirement of coalition-proofness. The main results are the following: first, the possibility of preference shocks yields a new set of collective incentive constraints. Productivity shocks have no such implication. Second, the optimal policy gives rise to a positive correlation between the public-goods provision level, the extent of redistribution and marginal tax rates.