Feasible implementation of taxation methods

Nir Dagan, Roberto Serrano, and Oscar Volij

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Abstract

This paper studies the problem of implementation of taxation methods in one-commodity environments in which the taxable incomes of the (at least two) agents are fixed and not known to the planner. In this problem (unlike most work in implementation theory), the feasible set is unknown to the designer. We first show that feasibility out of equilibrium imposes that the mechanism depend on the environment. Next we present two game forms. In the first one, which requires complete information among the tax payers, each agent reports the incomes of all players to a central agency, and implementation of every taxation method is obtained in Nash, strong and coalition-proof equilibrium. In the second, informational requirements may be somewhat relaxed. One of the agents makes a tax proposal, the others bargain with him, and the services of a central agency are used only to solve disputes between pairs of agents. This game form implements a large class of consistent and monotone taxation methods in subgame perfect equilibrium. Neither mechanism employs the off-equilibrium devices used by the general theory. Partial departures from complete information still allow for implementability. However, under fully private information implementation is not possible.

Keywords: Feasible Implementation, Taxation Methods, Consistency, Decentralization, Information, Flat Tax.

JEL: D31 and D71

Review of Economic Design 4:57-72 (1999)

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Cited by

  1. Tapan Mitra and Efe A. Ok, On the equitability of progressive taxation, Journal of Economic Theory 73:316-334 (1997)
  2. Nir Dagan, Roberto Serrano, and Oscar Volij, A noncooperative view of consistent bankruptcy rules, Games and Economic Behavior 18:55-72 (1997)
  3. Matthew O Jackson, A crash course in implementation theory, Social Choice and Welfare 18:655-708 (2001)
  4. William Thomson, On the axiomatic method and its recent applications to game theory and resource allocation, Social Choice and Welfare 18:327-386 (2001)
  5. David Perez-Castrillo and David Wettstein, Choosing wisely: a multibidding approach, American Economic Review 92:1577-1587 (2002)
  6. William Thomson, Axiomatic and game-theoretic analysis of bankruptcy and taxation problems: a survey, Mathematical Social Sciences 45:249297 (2003)
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  8. Joe Malkevitch, Resolving bankruptcy claims, Feature Column, Monthly Essays on Mathematical Topics, AMS website (March 2005)
  9. Ignacio García-Jurado, Julio González-Díaz, and Antonio Villar, A non-cooperative approach to bankruptcy problems, Spanish Economic Review 8:189197 (2006)
  10. Byungchae Rhee, A characterization of optimal feasible tax mechanism, Social Choice and Welfare 30:619653 (2008)