ABSTRACT
This chapter reviews the models of J. Mirrlees and N. H. Stern, and demonstrates what the estimates of labour supply functions. It sets out a general model of optimal linear taxation where government expenditure enters utility functions in a separable form. The chapter offers a brief analysis of M. Feldstein’s model when both effects are recognised. It explores the implications for optimal income taxation of including the benefits of government expenditure in individual utility functions in a more general way than that analysed by Feldstein. The Feldstein analysis assumes that government expenditure is a perfect substitute for a cash handout. The chapter aims to compute the full optimum in which both the tax rate and the level of spending are selected optimally. The optimum rate of tax was then calculated for the various values of the remaining parameters.
