Revisiting the Classical View of Benefit‐based Taxation

Abstract

This paper explores how the persistently popular classical logic of bene…t based taxation, in which an individual’s bene…t 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 bene…ts, …rst-best optimal policy can be characterized analytically as depending on a few potentially estimable statistics, in particular the coe¢ cient of complementarity between public goods and innate talent. Constrained optimal policy with a Pareto-e¢ cient 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 re‡ects the mixed normative reasoning behind prevailing