2025/09/03 by Emin Ablyatifov, Georgy Lukyanov, Ablyatifov, Emin +1
Economics, Econometrics and Finance · Social Sciences · #Economic Policies and Impacts #FOS: Economics and business #Fiscal Policy and Economic Growth #Local Government Finance and Decentralization #Theoretical Economics (econ.TH) #econ.TH
paper · pdf · doi:10.48550/arxiv.2509.03085
This paper has been incorporated into and superseded by the substantially revised and expanded paper "Government Reputation and Fiscal Capacity," arXiv:2509.03087
openalex publication_date 2025/09/03 · openalex created_date 2025/10/10 · arxiv created 2026/07/29 · openalex updated_date 2026/07/30 · arxiv updated 2026/07/31
We study optimal taxation when citizens are not fully confident that the government will transform tax revenue into useful public goods. In an otherwise standard Ramsey framework, a representative agent values a public good financed by distortionary taxes, but believes that the government is honest only with some given probability and may otherwise divert all revenue. This simple departure from the canonical model delivers two central results. First, there is a sharp trust threshold: if perceived government honesty is too low, any positive tax rate lowers expected welfare and the optimal policy is a zero-tax corner, even though the public good is valued. Second, once trust exceeds this threshold, the usual sufficient-statistics logic of optimal taxation re-emerges, but with a trust-adjusted marginal value of public funds that scales down the benefits of raising revenue. In a simple parametric example we obtain closed-form expressions that map trust into the optimal tax rate and the size of the public sector. The framework provides a compact way to incorporate government credibility into tax design and suggests that in low-trust environments credibility-enhancing reforms should precede attempts to expand the tax base.