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Distortionary Taxation and Optimal Public Spending on Productive Activities

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  • James P. Feehan

Abstract

Using a general-equilibrium model with endogenous factor supplies, this article investigates the provision of factor-augmenting public inputs. Such inputs are intermediate goods that affect production functions in a collective manner and give rise to increasing returns. Unlike with collective consumption goods, deviation from the first-best condition for a public input is inappropriate if taxes are set optimally. When taxes are not optimal, a second-best rule must include a feedback effect on revenue as well as the deadweight cost of taxes. Implications for benefit-cost analysis and for interpretation of estimates of the social returns to public capital are explored. Copyright 2002, Oxford University Press.

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Bibliographic Info

Article provided by Western Economic Association International in its journal Economic Inquiry.

Volume (Year): 40 (2002)
Issue (Month): 1 (January)
Pages: 60-68

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Handle: RePEc:oup:ecinqu:v:40:y:2002:i:1:p:60-68

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Citations

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Cited by:
  1. Diego Martinez-Lopez, 2004. "The optimal provision of public inputs in a second best scenario," Economics Bulletin, AccessEcon, vol. 8(3), pages 1-9.
  2. Gonzalo Fernández de Córdoba & José L. Torres, 2007. "Fiscal Harmonization in the Presence of Public Inputs," Economic Working Papers at Centro de Estudios Andaluces E2007/08, Centro de Estudios Andaluces.
  3. Fernández-de-Córdoba, Gonzalo & Torres, José L., 2012. "Fiscal harmonization in the European Union with public inputs," Economic Modelling, Elsevier, vol. 29(5), pages 2024-2034.
  4. Diego Martinez & A. Sanchez, 2010. "A note on the optimal level of public inputs," Social Choice and Welfare, Springer, vol. 34(3), pages 363-369, March.
  5. A. Jesus Sanchez Fuentes & Diego Martinez Lopez, 2006. "A new approach to solve non-regular constrained optimization problems. An application to optimal provision of public inputs," Working Papers 06.35, Universidad Pablo de Olavide, Department of Economics.
  6. A. Jesus Sanchez Fuentes & Diego Martinez Lopez, 2008. "Optimization in non-standard problems. An application to the provision of public inputs," Working Papers 08.07, Universidad Pablo de Olavide, Department of Economics.
  7. Sok-Gee Chan Mohd & Zaini Abd Karim, 2012. "Public Spending Efficiency And Political And Economic Factors: Evidence From Selected East Asian Countries," Economic Annals, Faculty of Economics, University of Belgrade, vol. 57(193), pages 7-24, April- Ju.
  8. Diego Martinez Lopez & A. Jesus Sanchez Fuentes, 2006. "On the optimal level of public inputs," Working Papers 06.34, Universidad Pablo de Olavide, Department of Economics, revised Mar 2008.
  9. Diego Martínez López, 2004. "Vertical externalities in the provision of public inputs," Economic Working Papers at Centro de Estudios Andaluces E2004/47, Centro de Estudios Andaluces.
  10. repec:ebl:ecbull:v:8:y:2004:i:3:p:1-9 is not listed on IDEAS
  11. Felicity C Barker & Robert A Buckle & Robert W St Clair, 2008. "Roles of Fiscal Policy in New Zealand," Treasury Working Paper Series 08/02, New Zealand Treasury.
  12. Diego Martínez López, 2005. "On states’ behavior with equalization grants," Hacienda Pública Española, IEF, vol. 174(3), pages 43-54, September.
  13. Diego Martínez-López, 2005. "On the states' behavior with equalization grants," Economic Working Papers at Centro de Estudios Andaluces E2005/03, Centro de Estudios Andaluces.

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