Optimal fiscal and public expenditure policy in a two-class economy

• Published in: Journal of public economics Vol. 61; no. 1; pp. 119 - 137
• Main Authors: Marchand, Maurice, Schroyen, Fred, Nava, Mario
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier 01-07-1996; Elsevier Sequoia S.A
• Series: Journal of Public Economics
• Subjects: Agency theory; Commodity markets; Economic models; Fiscal policy; Fiscal theory; Government spending; Income taxes; Optimal taxation; Public economics; Public expenditure; Studies; Taxation; Taxation economics; Utility functions
• ISSN: 0047-2727; 1879-2316
• DOI: 10.1016/0047-2727(95)01526-4

Optimal taxation and the provision of public goods in a 2-class economy with non-linear income and linear commodity taxes is addressed. As far as optimal taxation is concerned, it is shown that with 2 private goods, the good complementary with leisure should be taxed more heavily. The standard income tax rules are shown to be augmented by considerations for offsetting the distortions created on the commodity markets. As to the provision of public goods, recent results for a 2-class economy with public funds raised entirely by means of a non-linear income tax system are extended. The standard Samuelson rule is modified by 2 additional terms related to the self-selection constraint and to the revenue of indirect taxes. They are both shown to vanish when the agents' utility functions are weakly separable between public and private goods and leisure.