Ablyatifov, Emin and Lukyanov, GeorgyORCID: https://orcid.org/0009-0005-1672-610X (2026) Optimal Taxation under Imperfect Trust. TSE Working Paper, n. 26-1711, Toulouse

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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.