Abstract
We study optimal taxation when the conversion of tax revenue into public goods is uncertain. In a static Ramsey framework with a representative household, a competitive firm, and two broad instruments (a labor-income tax and a commodity/output tax), a simple measure of trust— the perceived likelihood that revenue is actually delivered as public consumption—scales the marginal value of public funds. We show: (i) a trust threshold below which any distortionary taxation reduces welfare; (ii) above that threshold, policy uniquely pins down the scale of taxation but leaves a continuum of tax mixes (an equivalence frontier) that implement the same allocation and welfare; and (iii) tiny administrative or salience wedges select a unique instrument, typically favoring a broad base collected at source. We derive a trust-adjusted Ramsey rule in sufficient-statistics form, establish robustness to mild preference non-separabilities and concave public-good utility, and provide an isoelastic specialization with transparent comparative statics.
Keywords
Optimal taxation; public goods; credibility; marginal value of public funds; tax; mix; administration.;
JEL codes
- E61: Policy Objectives • Policy Designs and Consistency • Policy Coordination
- H21: Efficiency • Optimal Taxation
- H30: General
- C73: Stochastic and Dynamic Games • Evolutionary Games • Repeated Games
Reference
Emin Ablyatifov, and Georgy Lukyanov, “Optimal Taxation under Imperfect Trust”, TSE Working Paper, n. 26-1711, February 2026.
See also
Published in
TSE Working Paper, n. 26-1711, February 2026