The Theory of Taxation and Public Economics

The Theory of Taxation and Public Economics

The Theory of Taxation and Public Economics

The Theory of Taxation and Public Economics


The Theory of Taxation and Public Economics presents a unified conceptual framework for analyzing taxation--the first to be systematically developed in several decades. An original treatment of the subject rather than a textbook synthesis, the book contains new analysis that generates novel results, including some that overturn long-standing conventional wisdom. This fresh approach should change thinking, research, and teaching for decades to come.

Building on the work of James Mirrlees, Anthony Atkinson and Joseph Stiglitz, and subsequent researchers, and in the spirit of classics by A. C. Pigou, William Vickrey, and Richard Musgrave, this book steps back from particular lines of inquiry to consider the field as a whole, including the relationships among different fiscal instruments. Louis Kaplow puts forward a framework that makes it possible to rigorously examine both distributive and distortionary effects of particular policies despite their complex interactions with others. To do so, various reforms--ranging from commodity or estate and gift taxation to regulation and public goods provision--are combined with a distributively offsetting adjustment to the income tax. The resulting distribution-neutral reform package holds much constant while leaving in play the distinctive effects of the policy instrument under consideration. By applying this common methodology to disparate subjects, The Theory of Taxation and Public Economics produces significant cross-fertilization and yields solutions to previously intractable problems.


The purpose of this book is to offer a unifying conceptual framework for the normative study of taxation and related subjects in public economics. Such a framework necessarily begins with a statement of the social objective, taken here to be the maximization of a conventional social welfare function, and then asks how various government instruments are best orchestrated to achieve it. The structure is built on the foundation provided by the fundamental theorems of welfare economics. The key deviation is due to the infeasibility of redistribution by individualized lump-sum taxation. Because of this limitation, the fiscal system relies significantly on income taxation, which gives rise to the basic tradeoff between distribution and distortion.

My motivating premise is that the analysis of various forms of taxation and of many other topics must be grounded explicitly in this framework. As a matter of a priori theory, this assertion seems self-evident. Its importance is reinforced by two considerations. First, the optimal use of any one instrument depends on which others are available and how they are employed. In the present context, the pivotal role of the income tax is particularly significant, and analysis that focuses on other instruments in isolation may be problematic. Second, in complex, second-best settings, failure to examine all the effects of a policy in terms of social welfare can be dangerous. For example, a reform that is found to reduce labor supply distortion may seem desirable on that account, but the reform may concomitantly reduce redistribution, perhaps to such an extent that overall welfare is lower. Examining only one set of effects can be misleading, especially when the omitted effects may systematically run in the opposite direction.

The most direct way to meet the challenge would be to optimize all instruments simultaneously. This task, however, is quite daunting even with only a few instruments and minimal complicating assumptions— all the more so when one piece of the problem includes optimal deployment of a nonlinear income tax. An alternative strategy, developed and . . .

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