Mixed Tax Systems and the Public Provision of Private Goods

Abstract

In contrast to what used to be conventional wisdom among economists,several recent contributions have shown that in-kind transfersschemes can be welfare-improving in the presence of distortionarytaxes (usually, linear taxes or a general income tax). In thisnote, we extend previous work by considering the most generaltax system compatible with reasonable information constraints,i.e. a mix of linear indirect and non-linear direct taxes. Threemain results are noted. We find that in the presence of a mixedtax system (as opposed to the non-linear income tax alone): i) not only encouraged but also discouraged goods satisfy a conditionfor the desirability of public provision; ii) there is a tendencyfor the optimal level of in-kind transfers to be lower; iii)there is a basic equivalence between uniform and income-contingentin-kind transfers. We also show how previous results can be derivedas special cases of ours and others have to be modified to accountfor the mixed tax system.