Taxation is a powerful device for affecting the behaviour of consumers. This is both an advantage, in the case of using taxes to discourage, or subsidies to encourage the consumption of some good, but also a disadvantage, as a result of the negative incentive effects that redistributive taxation creates. The justification for taxation might be purely efficiency, when taxation is unambiguously welfare improving. But when the justification for tax policy is based on considerations of equality or paternalistic objectives, the optimality of such taxation becomes more a question of values.
Tax policy, in its widest sense, includes almost all public sector activities: public sector finance in terms of tax revenues and expenditures like social security and public provision. A theoretical consideration of so large an entity is complex, and thus it is reasonable to break down the problem into smaller parts. Although the setting may not correspond to real life, it allows a more exact handling of the details building a bigger picture than would otherwise be possible.
The purpose of this thesis is to take gradual steps towards a more general setting in the theoretical framework of optimal taxation. The basic framework in the background considers the trade-off between efficiency and equality in a case where individuals differ in their wage earning abilities and that there is asymmetric information on this characteristic restricting the choice on the optimal tax policy. In this thesis the framework is generalised to a world with multidimensional heterogeneity among agents in several settings.
The two first essays respectively consider the use of commodity taxes together with income taxation in a model with environmental objectives in a world with non-fixed wages and heterogeneous preferences. The possible trade-off between environmental and redistributive objectives, suggested by the earlier empirical findings of regressive environmental taxes, is considered in both essays: it is found that that some of the harm from the externality may be compensated by gains in redistribution. It is also found that the efficiency and equity based parts in the commodity tax rates cannot necessarily be separated from each other.
The third essay considers paternalistic objectives and influencing the consumption of a meritorious good with the help of public provision in a case where some of the agents are not perfectly rational. It is found that even if both the aim to reduce the harm from irrationality and redistributive income taxation separately would speak for a positive level of public provision, when these two aims are put together, it is no longer clear that public provision improves welfare.
The last essay concerns life-time redistribution in a case where agents have different discount rates, concentrating on the tax treatment of savings, or, alternatively, a pension programme. The role of taxation of savings is considered in both a theoretical and a numerical framework. It is found that in a world with multidimensional heterogeneity there is a case for the non-linear taxation of savings.
