Mixed tax systems and the public provision of private goods

In contrast to what used to be conventional wisdom among economists, several recent contributions have shown that in-kind transfers schemes can be welfare-improving in the presence of distortionary taxes (usually, linear taxes or a general income tax). In this note, we extend previous work by considering the most general tax system compatible with reasonable information constraints, i.e. a mix of linear indirect and non-linear direct taxes. Three main results are noted. We find that in the presence of a mixed tax system (as opposed to the non-linear income tax alone): i) not only encouraged but also discouraged goods satisfy a condition for the desirability of public provision; ii) there is a tendency for the optimal level of in-kind transfers to be lower; iii) there is a basic equivalence between uniform and income-contingent in-kind transfers. We also show how previous results can be derived as special cases of ours and others have to be modified to account for the mixed tax system.