Technical Report Optimal Capital Income Taxation in the Case of Private Donations to Public Goods

Obara, Takuya  ,  Morita, Shigeo

16-21pp.1 - 13 , 2016-08 , Graduate School of Economics and Osaka School of International Public Policy (OSIPP) Osaka University
In this study, we investigate optimal nonlinear labor and capital income taxation and subsidies for contribution goods in a dynamic setting. We show that when individuals can contribute to a public good—even if additive and separable preference between consumption and labor supply is assumed and individuals differ only in earning ability—marginal capital income tax rate for low-income earners is not zero, indicating that the Atkinson–Stiglitz theorem does not hold. In particular, heterogeneous tastes for private consumptions endogenously occur. In addition, we derive a formula for optimal tax treatment of a public good, which is expressed in terms of the Pigouvian effect and the effect on an incentive compatibility constraint.

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