Consuming your way to efficiency: Public goods provision through non-distortionary tax lotteries

- Our non-linear lottery tax finances a public good and implements efficiency.
- This tax is composed of a linear ad-valorem tax and a refund lottery.
- The lottery tax does not distort consumption and balances the government's budget.
- Similar and easily adopted mechanisms are in place for deterring tax evasion.

We revisit the classical result that taxation of private consumption is distortionary and therefore precludes the efficient provision of public goods. We introduce a nonlinear consumption tax which we call a 'tax lottery'. Under this scheme, an ad-valorem consumption tax is supplemented with a lottery in which consumers can win cash prizes. The winning probabilities in this lottery depend on all consumers' private good consumption decisions. We show that for a given ad-valorem tax, an appropriately designed lottery can implement an efficient allocation in pure-strategy Nash equilibrium. The lottery component corrects the distortion in private consumption due to the ad-valorem tax, while the resulting tax revenue is sufficient to efficiently provide the public good and pay out the lottery prize.