Application of The els Model: Optimal Tax Rate and Public Good Proportion

Abstract

The purpose of this research is to apply an innovative economic model dubbed the els model to a fundamental question in public finance: (1)How much should the government take and (2) of this amount, how much should be devoted to provision of a pure public good (the remainder going to income redistribution)? The els model adds to the traditional two primary factors supplied by the household (labor and saving) a third primary factor: capital management effort. Capital management effort is a very general concept embracing any and all active behavior whose purpose it is to augment the rate of return received on the household's capital assets. An illustrative insight gained from the exercise is that regardless of the nature of capital property income (whether it is a return to saving or a return to capital management effort), a higher level of inequality in capital wealth ownership justifies a higher level of progressivity in the tax system.