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Optimal Redistributive Taxation$
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Matti Tuomala

Print publication date: 2016

Print ISBN-13: 9780198753414

Published to Oxford Scholarship Online: March 2016

DOI: 10.1093/acprof:oso/9780198753414.001.0001

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Public provision and optimal taxation

Public provision and optimal taxation

(p.323) 13 Public provision and optimal taxation
Optimal Redistributive Taxation

Matti Tuomala

Oxford University Press

As in the case of commodity taxation, publicly provided private goods and pure public goods can be seen as additional instruments for redistribution policy when these goods are financed by non-linear income taxation. Much of the activities of the modern welfare state are related to provision of private goods (education, health care, childcare and care of the elderly, etc.). In some developed countries the share of GDP would be as much as 15–20 per cent, whereas the share of pure public goods (general administration, defence etc.) is quite small. Redistribution is one, although not the only, reason for why these intrinsically private goods are publicly provided. Introducing additional distortion policies, which would not be used in a first-best world without asymmetric information, can be useful in a second-best situation, if they help mitigate the distortions stemming from the distortion income taxation. Chapter 13 extends the optimal labour income tax with provision of public goods and publicly provided private goods. As in Chapter 12, the key question is: can the government design a better redistribution system combining income taxation and public provision?

Keywords:   publicly provided private goods, public goods, public employment, minimum wage, tax evasion, redistribution

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