The optimal composition of government expenditure among transfers, education and public goods
AbstractThis paper examines the optimal allocation of tax revenue among a universal transfer payment, a pure public good and expenditure on education. Using a single-period framework, education expenditure raises the productivity of individuals via a human capital production function. The social welfare function is based on individuals’ (indirect) utilities. Education creates a substantial fiscal spillover whereby the increase in human capital gives rise to higher labour earnings and thus higher income tax revenue, thereby allowing greater government expenditure on all items than would otherwise be possible. A higher inequality of exogenous ability levels is found to increase all types of expenditure, but only the transfer increases in relative terms. Higher inequality aversion leads to an increase in transfer payments in absolute and relative terms, at the expense of the other two components. However, there is little sensitivity to inequality aversion. An increase in the elasticity of the wage with respect to basic ability leads to lower education spending.
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Bibliographic InfoArticle provided by IEF in its journal Hacienda Pública Española/Revista de Economía Pública.
Volume (Year): 194 (2010)
Issue (Month): 3 (June)
government expenditure; public goods; education; transfer payments; social welfare function.;
Find related papers by JEL classification:
- H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
- H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
- H52 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Education
- H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
- H75 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Government: Health, Education, and Welfare
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