Journal of Public Economics 79 (2001) 485–501 www.elsevier.nl / locate / econbase On optimal non-linear taxation and public good provision in an overlapping generations economy a b, * ¨ Jukka Pirttila , Matti Tuomala a Bank of Finland, Helsinki, Finland b Department of Economics, University of Tampere, P .O. Box 607, 33101 Tampere, Finland Received 1 April 1999; received in revised form 1 September 1999; accepted 2 September 1999 Abstract Using the self-selection approach to tax analysis within an OLG framework, the paper examines optimal non-linear labour and capital income taxation and the provision of a durable public good. Under endogenous wages, the marginal tax rules depend on the influence of the tax instruments on self-selection and on the income earning abilities of the households. In particular, we found that production inefficiency occurs in the model, justifying capital income taxation. For the public good, the paper derives a dynamic analogue of the second-best Samuelson rule, encompassing both inter- and intragenerational redistributive considerations. Furthermore, the usual conditions guaranteeing the efficiency of the first-best Samuelson rule are not sufficient in the present model.  2001 Elsevier Science B.V. All rights reserved. Keywords: Non-linear income taxation; Capital income taxation; Public good provision; Overlapping generations models JEL classification: H21; H41 1. Introduction The analysis of capital income taxation and the optimal provision of public goods are classical topics in public economics. It is well-known already from the *Corresponding author. E-mail address: ktmatuo@uta.fi (M. Tuomala). 0047-2727 / 01 / $ – see front matter  2001 Elsevier Science B.V. All rights reserved. PII: S0047-2727(99)00105-X