Distortionary taxation and the free-rider problem

Abstract

This paper derives a version of the Samuelson rule which takes into account that a distortionary Ramsey-tax system is used to finance public-goods provision. Individuals have private information about their public-goods preferences. Moreover, individuals differ in their productive abilities. The incidence of taxation in the Ramsey model implies that more productive individuals have a lower willingness to pay for public goods than less productive individuals. They are therefore tempted to understate their valuation of public goods and less productive individuals are inclined to exaggerate theirs. The paper characterizes an optimal rule for taxation and public-goods provision that eliminates these biases.