Working Paper: NBER ID: w20735
Authors: Matthew Weinzierl
Abstract: This paper explores how the persistently popular "classical" logic of benefit-based taxation, in which an individual's benefit from public goods is tied to his or her income-earning ability, can be incorporated into modern optimal tax theory. If Lindahl's methods are applied to that view of benefits, first-best optimal policy can be characterized analytically as depending on a few potentially estimable statistics, in particular the coefficient of complementarity between public goods and innate talent. Constrained optimal policy with a Pareto-efficient objective that strikes a balance–controlled by a single parameter–between this principle and the familiar utilitarian criterion can be simulated using conventional constraints and methods. A wide range of optimal policy outcomes can result, including those that match well several features of existing policies. To the extent that such an objective reflects the mixed normative reasoning behind prevailing policies, this model may offer a useful approach to a positive optimal tax theory.
Keywords: Benefit-based taxation; Optimal tax theory; Public goods; Income-earning ability
JEL Codes: D63; H21; H41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| classical view of benefit-based taxation (H20) | modern optimal tax theory (H21) |
| application of Lindahl's methods (C51) | characterization of first-best optimal policy (H21) |
| characterization of first-best optimal policy (H21) | depends on coefficient of complementarity between public goods and innate talent (H49) |
| constrained optimal policy with Pareto-efficient objective (H21) | balances benefit-based taxation and utilitarian criterion (H20) |
| public goods (H41) | influence individual abilities (I24) |
| individual abilities (D29) | affects optimal taxation (H21) |