Public Finance

This course gives an in depth introduction into the theory of optimal taxation. It discusses the welfare economic foundations of public finance, the Ramsey (1927) principles for optimal commodity taxation and Mirrlees' (1971) non-linear income tax. In addition, the main theorems in public finance will be covered: the Atkinson-Stiglitz (1976) theorem on the desirability of commodity/capital taxation and the Diamond-Mirrlees (1971) production effciency theorem. We will also discuss the Samuelson (1954) rule for the optimal provision of public goods in second-best settings with distortionary taxes. The main principles will then be applied to various topics such as optimal income redistribution, capital income taxation, human capital taxation, corrective taxation of externalities, optimal public goods provision in second best and the marginal cost of public funds. Finally, theory will be confronted with actual policy discussions, such as the flat-tax debate, the basic income, proposals for participation subsidies and in-work tax credits, consumption tax proposals, and carbon taxes.