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AbstractWe summarize the evolution of the theory of second best since the original contribution of Richard Lipsey and Kelvin Lancaster. Early studies investigated the optimality of piecemeal first‐best policy in controlled sectors when distortions exist elsewhere. The applied welfare economics approach of Arnold Harberger and its embodiment in cost–benefit analysis incorporated second‐best analysis into the evaluation of public programs. Modern second‐best analysis emphasizes policy‐making in a distorted economy where distortions reflect either constraints on government policy instruments or features of the economic environment such as limited government information. This is illustrated using optimal commodity and income taxation and its refinements to intertemporal and uncertain settings. Second‐best analysis is a defining feature of modern normative public economics.

I argue that a significant amount of income consists of windfall gains or rents. Rents accrue to firms and their owners, as well as to asset owners. They also accrue to income earners due to windfall changes in wage rates and rent-seeking opportunities. High-income persons obtain a disproportionate share of rents, and I investigate the consequences of that for Canadian tax policy. Some tax reforms suggested include adopting an allowance for corporate equity business tax system, abolishing the dividend tax credit and preferential treatment of capital gains, limiting the use of tax-free savings accounts, increasing the progressivity of income taxation, and adopting a guaranteed basic income.

Abstract We present a survey of key results from second‐best optimal redistribution theory and their implications for tax‐transfer policy. The core results include the Corlett‐Hague theorem, the Deaton conditions, the production‐efficiency theorem, the Atkinson‐Stiglitz theorem, and the Mirrlees‐Saez characterization of the optimal non‐linear income tax system. These have been augmented in recent years by optimal participation tax rates, the implications of involuntary unemployment, the use of unconventional instruments, such as minimum wages, in‐kind transfer, and workfare, and the optimal taxation of capital income and bequests.

This paper considers lessons from the practice of fiscal federalism for guidance on new approaches to development finance. Despite the fact that inter-regional redistribution in a federation relies on a central government with strong fiscal powers, the form of that redistribution can be used as a benchmark for international development assistance financing. In a federation, finance for less-developed regions takes the form of equalizing transfers to sub-national governments. The objective of these transfers is to enable sub-national governments to provide comparable levels of public services at comparable tax rates, called fiscal equity, leaving them discretion to implement interpersonal redistribution schemes within their jurisdictions. This same principle of assuming that national governments rather than donor nations are responsible for vertical equity within their borders leads to the view that the ideal form of development assistance is a system of equalizing inter-nation transfers intended to enhance fiscal equity.

Equalising transfers from central governments to subnational governments are features of the fiscal arrangements of many federations. It is argued that these transfers are necessary complements to systems of interpersonal redistribution. They facilitate the process of decentralisation by enabling subnational jurisdictions to exercise their autonomy in ways that do not detract from national objectives of equity and efficiency. This is because decentralisation inevitably results in subnational jurisdictions taking on tasks that have consequences for the attainment of these objectives, and it also results in different jurisdictions having differing fiscal capacity to deliver the services assigned to them. The benefits and costs of fiscal decentralisation are summarised. Properly designed fiscal sharing schemes enable the benefits of decentralisation to be achieved without incurring all the costs. Some of the features of fiscal sharing schemes that might accomplish this are outlined.

Equalizing transfers from central governments to subnational governments are features of the fiscal arrangements of many federations. It is argued that these transfers are necessary complements to systems of interpersonal redistribution. They facilitate the process of decentralization by enabling subnational jurisdictions to exercise their autonomy in ways that do not detract from national objectives of equity & efficiency. This is because decentralization inevitably results in subnational jurisdictions taking on tasks that have consequences for the attainment of these objectives, & it also results in different jurisdictions having differing fiscal capacity to deliver the services assigned to them. The benefits & costs of fiscal decentralization are summarized. Properly designed fiscal sharing schemes enable the benefits of decentralization to be achieved without incurring all the costs. Some of the features of fiscal sharing schemes that might accomplish this are outlined. 6 References. Adapted from the source document.

Item consists of a digitized copy of an audio recording of an E.S. Woodward Lecture delivered at the Vancouver Institute by Robin Boadway on February 25, 1995. Original audio recording available in the University Archives (UBC AT 1952). Also included is a PDF copy of the edited lecture that appeared in "The Vancouver Institute: an experiment in public education" Peter Nemetz (ed). ; Other UBC ; Unreviewed ; Other