Budget Balancedness and Optimal Income Taxation

Creators: Berliant, Marcus; Page, Frank H., Jr.

Abstract

We make two main contributions to the theory of optimal income taxation. First, assuming conditions sufficient for existence of a Pareto optimal income tax and public goods mechanism, we show that if agents' preferences satisfy an extended notion of single crossing called capacity constrained single crossing, then there exists a Pareto optimal income tax and public goods mechanism that is budget balancing. Second, we show that, even without capacity constrained single crossing, existence of a budget balancing, Pareto optimal income tax and public goods mechanism is guaranteed if the set of agent types contains no atoms.

Additional Information

The current version of this paper was completed while the first author was visiting Caltech. An earlier version of this paper, entitled "Income Taxes and the Provision of Public Goods: Optima and Balanced Government Budgets," was completed while the second author was visiting CERMSEM, Paris I (Pantheon-Sorbonne). Both authors thank these institutions for support and hospitality. Both authors also thank seminar participants at UC Riverside and Vanderbilt University for many helpful comments. Berliant gratefully acknowledges financial support from the National Science Foundation, grant number SBR 93 19994, and the American Philosophical Society. Page gratefully acknowledges financial support from the University of Alabama and CERMSEM. The authors bear full responsibility for any remaining errors. Published as Berliant, Marcus and Page, Frank H., Jr. (2006) Budget balancedness and optimal tax income. Journal of Public Economic Theory, 8 (3). pp. 409-451. ISSN 1097-3923.

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