In the previous chapter, the taxation of transactions has been justified by incentive compatibility arguments. These arguments can be briefly recalled as follows: as the agents' characteristics upon which transfers should be based are private information, a central authority is bound to the use of mechanisms whose enforceable outcomes are verifiable variables. Assuming that the (observable) variables were the net trades between the production and the consumption sector, we have shown conditions under which the outcomes which can finally be achieved are the same as those which would prevail in the presence of tax systems mixing linear and nonlinear taxes.

As noted earlier, the basic argument of the preceding chapter holds true with a fixed bundle of public consumption. The model we consider in the following actually incorporates public goods, but their level is possibly variable. We leave it to the reader to see how and under which conditions - concerning the nature of conditional information on the taste parameters for public goods - the conclusions of the previous chapter extend to the case of this chapter.

In this chapter, we shall only consider linear taxation and shall rule out non-linear taxes associated in the previous chapter with commodities L2. This modelling option is first justified by its simplicity. Non-linear schedules are difficult to handle in a general context: understanding fully what is going on in the simple case of linear taxes is a natural first step towards an in-depth investigation (sketched in chapter 4) of the more difficult nonlinear problem. Linearization, here as in many other scientific fields, is a useful simplifying device. Also, simplicity is not here so much at odds with realism. Non-linearities in real tax systems are generally concentrated in income tax schedules that display a limited number of marginal tax rates.