This paper develops a Mirrlees (1971) framework with heterogeneous agents to analyze optimal redistributive taxes, optimal provision of public goods and the marginal cost of public funds (MCF). Standard MCF measures are shown to suffer from three defects: i) The MCF for the (non-individualized)...

We show in a two-period world with endogenous savings and two assets, one of them exhibiting a stochastic return, that an interest-adjusted income tax is optimal. This tax leaves a riskless component of interest income tax free and taxes the excess return with a special tax rate. There is no...