Distribution, Distortionary Taxation, and the Evaluation of Public Goods

This paper develops a new approach for determining optimal government policy that takes into account the influences of distribution and distortionary taxation, and illustrates that approach by applying it in three specific policy contexts: commodity taxation, public good provision, and environmental taxation. The paper makes three main contributions. First, for each problem, the paper derives an expression for optimum policy that doesn’t rely on the simplifying assumptions used in prior work. Beyond their direct value for guiding policy, these expressions also show how distribution and distortionary taxation affect optimal policy in general. Second, the paper ties together previously separate literatures on each of these three policy problems, showing key similarities and parallel results. And third, the paper reconciles differences in prior work between models that use representative-agent models and those that use multiple-agent models. It shows that both yield fundamentally the same results if the distribution of the net benefit of the policy is proportional to income. Prior studies have found very different results for the two types of models, but these stem primarily from differences in simplifying assumptions, rather than from fundamental differences between the models