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The Optimal Size of Public Spending and the Distortionary Cost of Taxation

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  • Ng, Yew-Kwang

Abstract

Feldstein (1997) reviews contributions in distortionary costs of taxation, estimating that the cost per incremental dollar of government spending is $2.65. Kaplow (1996) favors the supply of a public good whenever the benefit/cost ratio exceeds one, contrary to the orthodox position that has existed since Pigou (1928). This paper largely reconciles these two opposing positions. The large distortionary costs exist on the revenue side, but are largely offset by the negative distortionary costs on the spending side or by the distributional gain. Kaplow’s and Feldstein’s arguments have to be subject to important qualifications. Additional arguments relevant to "How big should the public spending be?" are also reviewed. Environmental disruption effects, burden-free taxes on diamond goods, and relative-income effects all favor more public spending.

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Bibliographic Info

Article provided by National Tax Association in its journal National Tax Journal.

Volume (Year): 53 (2000)
Issue (Month): n. 2 (June)
Pages: 253-72

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Handle: RePEc:ntj:journl:v:53:y:2000:i:n._2:p:253-72

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  1. Martin Feldstein, 1995. "Tax Avoidance and the Deadweight Loss of the Income Tax," NBER Working Papers 5055, National Bureau of Economic Research, Inc.
  2. Ng, Yew-Kwang & Wang, Jianguo, 1993. "Relative income, aspiration, environmental quality, individual and political myopia : Why may the rat-race for material growth be welfare-reducing?," Mathematical Social Sciences, Elsevier, vol. 26(1), pages 3-23, July.
  3. Ng, Yew-Kwang, 1975. "Non-Economic Activities, Indirect Externalities, and Third-Best Politics," Kyklos, Wiley Blackwell, vol. 28(3), pages 507-25.
  4. Ng, Yew-Kwang, 1977. "Towards a Theory of Third-Best," Public Finance = Finances publiques, , vol. 32(1), pages 1-15.
  5. Yew-Kwang Ng & Guang-Zhen Sun, 2006. "Introduction," Division of Labor & Transaction Costs (DLTC), World Scientific Publishing Co. Pte. Ltd., vol. 1(02), pages 99-103.
  6. Ng, Yew-Kwang, 1987. "Diamonds Are a Government's Best Friend: Burden-Free Taxes on Goods Valued for Their Values," American Economic Review, American Economic Association, vol. 77(1), pages 186-91, March.
  7. Ng, Yew-Kwang, 1987. "Relative-Income Effects and the Appropriate Level of Public Expenditure," Oxford Economic Papers, Oxford University Press, vol. 39(2), pages 293-300, June.
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Cited by:
  1. Louis Kaplow, 2003. "Transition Policy: A Conceptual Framework," NBER Working Papers 9596, National Bureau of Economic Research, Inc.
  2. Yew-Kwang Ng, 2004. "Optimal Environmental Charges/Taxes: Easy to Estimate and Surplus-yielding," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 28(4), pages 395-408, August.
  3. Will Martin & James E. Anderson, 2005. "Costs of Taxation and the Benefits of Public Goods: The Role of Income Effects," Boston College Working Papers in Economics 617, Boston College Department of Economics.
  4. Johansson-Stenman, Olof, 2001. "Should We Use Distributional Weights in CBA When Income Taxes Can Deal with Equity?," Working Papers in Economics 35, University of Gothenburg, Department of Economics.
  5. José Manuel González-Páramo, . "Midiendo El Coste Marginal En Bienestar De Una Reforma Impositiva," Working Papers 32-02 Classification-JEL , Instituto de Estudios Fiscales.
  6. Wendner, Ronald & Goulder, Lawrence H., 2008. "Status Effects, Public Goods Provision, and the Excess Burden," MPRA Paper 8260, University Library of Munich, Germany.
  7. Louis Kaplow, 2003. "Public Goods and the Distribution of Income," NBER Working Papers 9842, National Bureau of Economic Research, Inc.
  8. Louis Kaplow, 2006. "Optimal Control of Externalities in the Presence of Income Taxation," NBER Working Papers 12339, National Bureau of Economic Research, Inc.
  9. Wendner, Ronald & Goulder, Lawrence H., 2008. "Status effects, public goods provision, and excess burden," Journal of Public Economics, Elsevier, vol. 92(10-11), pages 1968-1985, October.
  10. Joel Slemrod & Shlomo Yitzhaki, 2001. "Integrating Expenditure and Tax Decisions: The Marginal Cost of Funds and the Marginal Benefit of Projects," NBER Working Papers 8196, National Bureau of Economic Research, Inc.
  11. Richard G. Lipsey, 2012. "A critique of Ng's third-best theory," Discussion Papers dp12-02, Department of Economics, Simon Fraser University.
  12. Richard M. bird, 2003. "Taxation in Latin America: Reflections on Sustainability and the Balance between Equity and Efficiency," International Tax Program Papers 0306, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto.
  13. Parry, Ian, 2000. "Comparing the Marginal Excess Burden of Labor, Gasoline, Cigarette and Alcohol Taxes: An Application to the United Kingdom," Discussion Papers dp-00-33-rev, Resources For the Future.
  14. Louis Kaplow, 2004. "On the (Ir)Relevence of Distribution and Labor Supply Distortion of Government Policy," NBER Working Papers 10490, National Bureau of Economic Research, Inc.
  15. Louis Kaplow, 2010. "Optimal Control of Externalities in the Presence of Income Taxation," STICERD - Public Economics Programme Discussion Papers 02, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  16. Barnett, W.S. & Masse, Leonard N., 2007. "Comparative benefit-cost analysis of the Abecedarian program and its policy implications," Economics of Education Review, Elsevier, vol. 26(1), pages 113-125, February.
  17. Massimo Florio & Sara Colautti, 2005. "A logistic growth theory of public expenditures: A study of five countries over 100 years," Public Choice, Springer, vol. 122(3), pages 355-393, March.

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