Public Input Provision in an Optimal Income Tax Model

This paper derives and examines the provision rule for public inputs within a two-class framework of optimal income taxation. If income redistribution policies must be designed under a self-selection constraint because the ability of any particular worker is private information, public input provision is used as a means of relaxing this constraint. This use of public inputs for helping income redistribution entails a deviation from the first-best provision rule. The resultant inefficiency is due to the impact of public input provision on the wage differential between workers with different abilities.